**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**(MarkOne)**
| x                                                                                                                                                                                      | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                   |       |                                                                                                    |
| **For the  quarterly period ended June 30, 2006**                                                                                                                                      |
|                                                                                                                                                                                   |       |                                                                                                    |
| **OR**                                                                                                                                                                                 |
|                                                                                                                                                                                   |       |                                                                                                    |
| o                                                                                                                                                                                      | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                   | ** ** | ** **                                                                                              |
| **For the  transition period  from            to            ** |
| ** **                                                                                                                                                                             |
| **Commission  file number 000-31511**                                                                                                                                                  |

 

**@Road, Inc.**

(Exact name of registrantas specified in its charter)
| **Delaware**                     | **94-3209170**       |
|----------------------------------|----------------------|
| (State or other  jurisdiction of | (I.R.S. Employer     |
| incorporation or  organization)  | Identification  No.) |

 

**47071 Bayside ParkwayFremont, CA 94538**

(Address of principalexecutive offices, including zip code)

**510-668-1638**

(Registrant’s telephonenumber, including area code)

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

Yes  x    No  o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act. (Check one):
| Large Accelerated Filer o | Accelerated  Filer x | Non-Accelerated Filer o |
|---------------------------|----------------------|-------------------------|

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  o    No    x

As of August 1, 2006there were 61,705,410 shares of the registrant’s Common Stock outstanding.

 

----

 

**INDEX**
| **PART I.**   | ** ** | **FINANCIAL  INFORMATION**                                                                                                                                 | 1  |
|---------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|----|
|          |       | Item 1.  Financial Statements                                                                                                                         | 1  |
|          |       | Condensed  Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005                                                                      | 1  |
|          |       | Condensed Consolidated  Statements of Operations for the three and six months ended June 30, 2006 and  2005 (As Restated)                                  | 2  |
|          |       | Condensed Consolidated Statements of  Stockholders’ Equity for the six months ended June 30, 2006, December 31,  2005 and June 30, 2005 (As Restated) | 3  |
|          |       | Condensed Consolidated Statements of Cash Flows for  the six months ended June 30, 2006 and 2005 (As Restated)                                             | 4  |
|          |       | Notes to Condensed Consolidated Financial  Statements                                                                                                      | 5  |
|          |       | Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations                                                  | 22 |
|          |       | Item 3.  Quantitative and Qualitative Disclosures About Market Risk                                                                                   | 43 |
|          |       | Item 4.  Controls and Procedures                                                                                                                      | 44 |
| **PART  II.** | ** ** | **OTHER  INFORMATION**                                                                                                                                     | 46 |
|          |       | Item 1.  Legal Proceedings                                                                                                                            | 46 |
|          |       | Item 1A.  Risk Factors                                                                                                                                | 46 |
|          |       | Item  2. Unregistered Sales of Equity Securities and Use of Proceeds                                                                                       | 46 |
|          |       | Item  3. Defaults Upon Senior Securities                                                                                                                   | 47 |
|          |       | Item  4. Submission of Matters to a Vote of Security Holders                                                                                               | 47 |
|          |       | Item 5.  Other Information                                                                                                                                 | 47 |
|          |       | Item 6.  Exhibits                                                                                                                                     | 47 |

----

 

**PART I. FINANCIAL INFORMATION**

**Item 1. Financial Statements.**

**@Road,Inc.**

**CondensedConsolidated Balance Sheets(In thousands, except per share data) (unaudited)**
| ** **                                                                                                                                                                                       | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                                                       |       |                    |       |                        |       |
| Current assets:                                                                                                                                                                                  |       |                    |       |                        |       |
| Cash and cash equivalents                                                                                                                                                                        |       | $                       | 10,130     |                        | $          | 25,773 |   |
| Short-term investments                                                                                                                                                                           |       | 81,064                  |       | 77,643                      |       |
| Accounts receivable, net                                                                                                                                                                         |       | 12,536                  |       | 12,475                      |       |
| Inventories                                                                                                                                                                                      |       | 12,654                  |       | 6,087                       |       |
| Deferred product costs                                                                                                                                                                           |       | 15,559                  |       | 16,187                      |       |
| Deferred tax assets                                                                                                                                                                              |       | 1,490                   |       | 1,448                       |       |
| Prepaid expenses and other                                                                                                                                                                       |       | 2,320                   |       | 2,566                       |       |
| Total current assets                                                                                                                                                                             |       | 135,753                 |       | 142,179                     |       |
| Property and equipment, net                                                                                                                                                                      |       | 6,643                   |       | 6,195                       |       |
| Deferred product costs                                                                                                                                                                           |       | 21,631                  |       | 16,995                      |       |
| Deferred tax assets                                                                                                                                                                              |       | 40,436                  |       | 39,843                      |       |
| Goodwill                                                                                                                                                                                         |       | 13,341                  |       | 13,341                      |       |
| Intangible assets, net                                                                                                                                                                           |       | 25,313                  |       | 27,333                      |       |
| Other non-current assets                                                                                                                                                                         |       | 664                     |       | 400                         |       |
|                                                                                                                                                                                             |       |                    |       |                        |       |
| Total assets                                                                                                                                                                                     |       | $                       | 243,781    |                        | $          | 246,286 |   |
|                                                                                                                                                                                             |       |                    |       |                        |       |
| **LIABILITIES, REDEEMABLE  PREFERRED STOCK AND STOCKHOLDERS’ EQUITY**                                                                                                                       | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Current liabilities:                                                                                                                                                                             |       |                    |       |                        |       |
| Accounts payable                                                                                                                                                                                 |       | $                       | 5,881      |                        | $          | 6,653 |   |
| Accrued liabilities                                                                                                                                                                              |       | 7,900                   |       | 8,751                       |       |
| Deferred revenue and customer deposits                                                                                                                                                           |       | 17,096                  |       | 15,495                      |       |
| Derivative instrument                                                                                                                                                                            |       | 3,930                   |       | 1,457                       |       |
|                                                                                                                                                                                             |       |                    |       |                        |       |
| Total current liabilities                                                                                                                                                                        |       | 34,807                  |       | 32,356                      |       |
| Deferred revenue                                                                                                                                                                                 |       | 16,646                  |       | 17,333                      |       |
| Deferred tax liabilities                                                                                                                                                                         |       | —                  |       | 323                         |       |
| Derivative instrument                                                                                                                                                                            |       | —                  |       | 1,457                       |       |
| Other long-term liabilities                                                                                                                                                                      |       | 411                     |       | 461                         |       |
| Total liabilities                                                                                                                                                                                |       | 51,864                  |       | 51,930                      |       |
|                                                                                                                                                                                             |       |                    |       |                        |       |
| Commitments and contingencies (Note 11)                                                                                                                                                          |       |                    |       |                        |       |
|                                                                                                                                                                                             |       |                    |       |                        |       |
| Preferred stock, $0.001 par value, 10,000 shares  authorized, 98 shares designated as redeemable preferred stock, shares issued  and outstanding: 78 at June 30, 2006 and December 31, 2005 |       | 8,434                   |       | 8,184                       |       |
|                                                                                                                                                                                             |       |                    |       |                        |       |
| Stockholders’ equity:                                                                                                                                                                       |       |                    |       |                        |       |
| Common stock, $0.0001 par value, 250,000 shares  authorized, shares issued and outstanding: 61,688 at June 30, 2006 and 61,154  at December 31, 2005                                        |       | 268,922                 |       | 265,347                     |       |
| Note receivable from stockholder                                                                                                                                                                 |       | (5                      | )          | (7                          | )          |
| Accumulated other comprehensive loss                                                                                                                                                             |       | (102                    | )          | (78                         | )          |
| Accumulated deficit                                                                                                                                                                              |       | (85,332                 | )          | (79,090                     | )          |
|                                                                                                                                                                                             |       |                    |       |                        |       |
| Total stockholders’ equity                                                                                                                                                                  |       | 183,483                 |       | 186,172                     |       |
|                                                                                                                                                                                             |       |                    |       |                        |       |
| Total  liabilities, redeemable preferred stock and stockholders’ equity                                                                                                                     |       | $                       | 243,781    |                        | $          | 246,286 |   |

 

See notes to condensedconsolidated financial statements.

1

----

 

**@Road, Inc.Condensed Consolidated Statements of Operations(In thousands, except per share data) (unaudited)**
| ** **                                                                    | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                    | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                    | ** ** | ** **                                      | ** ** | **As Restated**                          | ** ** | ** ** | ** ** | **As Restated** | ** ** |
| ** **                                                                    | ** ** | ** **                                      | ** ** | **(See Note 1)**                    | ** ** | ** ** | ** ** | **(See Note 1)** | ** ** |
| Revenues:                                                                     |       |                                            |       |                                          |       |   |   |   |   |
| Hosted                                                                        |       | $                                               | 19,642     |                                          | $          | 19,685 |   | $ | 40,605 |   | $ | 39,175 |   |
| Licensed                                                                      |       | 3,559                                           |       | 941                                           |       | 7,341 |   | 1,443 |   |
|                                                                          |       |                                            |       |                                          |       |   |   |   |   |
| Total revenues                                                                |       | 23,201                                          |       | 20,626                                        |       | 47,946 |   | 40,618 |   |
|                                                                          |       |                                            |       |                                          |       |   |   |   |   |
| Costs and expenses:                                                           |       |                                            |       |                                          |       |   |   |   |   |
| Cost of hosted  revenue (excluding intangibles amortization included below)   |       | 11,345                                          |       | 9,227                                         |       | 22,347 |   | 18,751 |   |
| Cost of licensed  revenue (excluding intangibles amortization included below) |       | 1,127                                           |       | 1,473                                         |       | 2,357 |   | 2,173 |   |
| Intangibles  amortization                                                     |       | 1,010                                           |       | 1,010                                         |       | 2,020 |   | 1,467 |   |
| Sales and  marketing                                                          |       | 5,506                                           |       | 5,832                                         |       | 11,424 |   | 10,479 |   |
| Research and  development                                                     |       | 4,210                                           |       | 3,849                                         |       | 7,879 |   | 6,424 |   |
| General and  administrative                                                   |       | 5,028                                           |       | 3,942                                         |       | 9,970 |   | 8,389 |   |
| In-process  research and development                                          |       | —                                          |       | —                                        |       | — |   | 5,640 |   |
|                                                                          |       |                                            |       |                                          |       |   |   |   |   |
| Total costs and  expenses                                                     |       | 28,226                                          |       | 25,333                                        |       | 55,997 |   | 53,323 |   |
|                                                                          |       |                                            |       |                                          |       |   |   |   |   |
| Loss from operations                                                          |       | (5,025                                          | )          | (4,707                                        | )          | (8,051 | ) | (12,705 | ) |
|                                                                          |       |                                            |       |                                          |       |   |   |   |   |
| Other income (expense),  net:                                                 |       |                                            |       |                                          |       |   |   |   |   |
| Interest income,  net                                                         |       | 1,077                                           |       | 729                                           |       | 2,113 |   | 1,347 |   |
| Change in  derivative instrument liability                                    |       | 135                                             |       | (3,332                                        | )          | (1,016 | ) | (4,073 | ) |
| Other expense,  net                                                           |       | (5                                              | )          | (154                                          | )          | (22 | ) | (152 | ) |
|                                                                          |       |                                            |       |                                          |       |   |   |   |   |
| Total other  income (expense), net                                            |       | 1,207                                           |       | (2,757                                        | )          | 1,075 |   | (2,878 | ) |
|                                                                          |       |                                            |       |                                          |       |   |   |   |   |
| Net loss before income  taxes                                                 |       | (3,818                                          | )          | (7,464                                        | )          | (6,976 | ) | (15,583 | ) |
| Benefit from income  taxes                                                    |       | 322                                             |       | 3,195                                         |       | 734 |   | 3,195 |   |
| Net loss                                                                      |       | (3,496                                          | )          | (4,269                                        | )          | (6,242 | ) | (12,388 | ) |
| Preferred stock  dividends                                                    |       | (126                                            | )          | (124                                          | )          | (250 | ) | (181 | ) |
|                                                                          |       |                                            |       |                                          |       |   |   |   |   |
| Net loss attributable  to common stockholders                                 |       | $                                               | (3,622     | )                                             | $          | (4,393 | ) | $ | (6,492 | ) | $ | (12,569 | ) |
|                                                                          |       |                                            |       |                                          |       |   |   |   |   |
| Net loss per share:                                                           |       |                                            |       |                                          |       |   |   |   |   |
| Basic                                                                         |       | $                                               | (0.06      | )                                             | $          | (0.07 | ) | $ | (0.11 | ) | $ | (0.21 | ) |
|                                                                          |       |                                            |       |                                          |       |   |   |   |   |
| Diluted                                                                       |       | $                                               | (0.06      | )                                             | $          | (0.07 | ) | $ | (0.11 | ) | $ | (0.21 | ) |
|                                                                          |       |                                            |       |                                          |       |   |   |   |   |
| Shares used in  calculating net loss per share:                          |       |                                            |       |                                          |       |   |   |   |   |
| Basic                                                                         |       | 61,527                                          |       | 60,551                                        |       | 61,363 |   | 58,977 |   |
|                                                                          |       |                                            |       |                                          |       |   |   |   |   |
| Diluted                                                                       |       | 61,527                                          |       | 60,551                                        |       | 61,363 |   | 58,977 |   |

 

See notes to condensed consolidated financialstatements.

2

----

 

**@Road, Inc.**

**CondensedConsolidated Statements of Stockholders’ Equity**

**For the Six Months Ended June 30,2006, December 31, 2005 (As Restated)**

**and June 30, 2005 (As Restated)**

**(Inthousands) (unaudited)**
| ** **                                                             | ** ** | **Common Stock** | ** ** | **Note  Receivable  From** | ** ** | **Accumulated   Other  Comprehensive** | ** ** | **Accumulated** | ** ** | **Stockholders’** | ** ** | **Total  Comprehensive** | ** ** |
|------------------------------------------------------------------------|------------|-----------------------|------------|----------------------------|------------|---------------------------------------------|------------|-----------------|------------|------------------------|------------|--------------------------|------------|
| ** **                                                             | ** ** | **Shares**            | ** ** | **Amount**                 | ** ** | **Stockholder**                             | ** ** | **Loss**        | ** ** | **Deficit**            | ** ** | **Equity**               | ** ** | **Income (Loss)** | ** ** |
| BALANCES, January 1, 2005                                         |       | 54,805                |       | $                          | 232,016    |                                        | $          | —          |       | $                      | (179       | )                        | $          | (107,001 | ) | $ | 124,836 |   |   |   |
| Net loss (As Restated) (See Note 1)                               |       |                  |       |                       |       |                                        |       |            |       | (12,388                | )          | (12,388                  | )          | $ | (12,388 | ) |
| Change in unrealized loss on short-term investments                    |       |                  |       |                       |       |                                        |       | 98              |       |                   |       | 98                       |       | 98 |   |
|                                                                   |       |                  |       |                       |       |                                        |       |            |       |                   |       |                     |       |   |   |
| Comprehensive loss                                                     |       |                  |       |                       |       |                                        |       |            |       |                   |       |                     |       | $ | (12,290 | ) |
|                                                                   |       |                  |       |                       |       |                                        |       |            |       |                   |       |                     |       |   |   |
| Shares issued upon acquisition of Vidus, net of issuance costs of $478 |       | 5,454                 |       | 24,228                     |       |                                        |       |            |       |                   |       | 24,228                   |       |   |   |
| Fully vested options issued upon acquisition of Vidus                  |       |                  |       | 531                        |       |                                        |       |            |       |                   |       | 531                      |       |   |   |
| Shares issued under employee stock purchase plan                       |       | 295                   |       | 849                        |       |                                        |       |            |       |                   |       | 849                      |       |   |   |
| Exercise of stock options                                              |       | 142                   |       | 280                        |       |                                        |       |            |       |                   |       | 280                      |       |   |   |
| Issuance of note receivable to stockholder                             |       |                  |       |                       |       | (11                                         | )          |            |       |                   |       | (11                      | )          |   |   |
| Collection of note receivable from stockholder                         |       |                  |       |                       |       | 3                                           |       |            |       |                   |       | 3                        |       |   |   |
| Dividends on redeemable preferred stock                                |       |                  |       | (181                       | )          |                                        |       |            |       |                   |       | (181                     | )          |   |   |
|                                                                   |       |                  |       |                       |       |                                        |       |            |       |                   |       |                     |       |   |   |
| BALANCES, June 30, 2005 (As Restated) (See Note 1)                |       | 60,696                |       | 257,723                    |       | (8                                          | )          | (81             | )          | (119,389               | )          | 138,245                  |       |   |   |
| Net income (As Restated) (See Note 1)                        |       |                  |       |                       |       |                                        |       |            |       | 40,299                 |       | 40,299                   |       | $ | 40,299 |   |
| Change in unrealized loss on short-term investments                    |       |                  |       |                       |       |                                        |       | 3               |       |                   |       | 3                        |       | 3 |   |
|                                                                   |       |                  |       |                       |       |                                        |       |            |       |                   |       |                     |       |   |   |
| Comprehensive income (As Restated) (See Note 1)                        |       |                  |       |                       |       |                                        |       |            |       |                   |       |                     |       | $ | 40,302 |   |
|                                                                   |       |                  |       |                       |       |                                        |       |            |       |                   |       |                     |       |   |   |
| Shares issued under employee stock purchase plan                       |       | 285                   |       | 829                        |       |                                        |       |            |       |                   |       | 829                      |       |   |   |
| Exercise of stock options                                              |       | 173                   |       | 298                        |       |                                        |       |            |       |                   |       | 298                      |       |   |   |
| Collection of note receivable from stockholder                         |       |                  |       |                       |       | 1                                           |       |            |       |                   |       | 1                        |       |   |   |
| Dividends on redeemable preferred stock                                |       |                  |       | (255                       | )          |                                        |       |            |       |                   |       | (255                     | )          |   |   |
| Tax benefit on the exercise of employee stock options                  |       |                  |       | 6,752                      |       |                                        |       |            |       |                   |       | 6,752                    |       |   |   |
|                                                                   |       |                  |       |                       |       |                                        |       |            |       |                   |       |                     |       |   |   |
| BALANCES, December 31, 2005                                       |       | 61,154                |       | 265,347                    |       | (7                                          | )          | (78             | )          | (79,090                | )          | 186,172                  |       |   |   |
| Net loss                                                               |       |                  |       |                       |       |                                        |       |            |       | (6,242                 | )          | (6,242                   | )          | $ | (6,242 | ) |
| Change in unrealized loss on short-term investments                    |       |                  |       |                       |       |                                        |       | (24             | )          |                   |       | (24                      | )          | (24 | ) |
|                                                                   |       |                  |       |                       |       |                                        |       |            |       |                   |       |                     |       |   |   |
| Comprehensive loss                                                     |       |                  |       |                       |       |                                        |       |            |       |                   |       |                     |       | $ | (6,266 | ) |
|                                                                   |       |                  |       |                       |       |                                        |       |            |       |                   |       |                     |       |   |   |
| Shares issued under employee stock purchase plan                       |       | 314                   |       | 941                        |       |                                        |       |            |       |                   |       | 941                      |       |   |   |
| Exercise of stock options                                              |       | 220                   |       | 570                        |       |                                        |       |            |       |                   |       | 570                      |       |   |   |
| Stock-based compensation                                               |       |                  |       | 2,124                      |       |                                        |       |            |       |                   |       | 2,124                    |       |   |   |
| Collection of note receivable from stockholder                         |       |                  |       |                       |       | 2                                           |       |            |       |                   |       | 2                        |       |   |   |
| Dividends on redeemable preferred stock                                |       |                  |       | (250                       | )          |                                        |       |            |       |                   |       | (250                     | )          |   |   |
| Excess tax benefit on the exercise of employee stock options           |       |                  |       | 190                        |       |                                        |       |            |       |                   |       | 190                      |       |   |   |
|                                                                   |       |                  |       |                       |       |                                        |       |            |       |                   |       |                     |       |   |   |
| BALANCES, June 30, 2006                                                |       | 61,688                |       | $                          | 268,922    |                                        | $          | (5              | )          | $                      | (102       | )                        | $          | (85,332 | ) | $ | 183,483 |   |   |   |

 

See notes to condensed consolidated financial statements.

3

----

 

**@Road, Inc.**

**Condensed Consolidated Statements of Cash Flows**

**(In thousands) (unaudited)**

 
| ** **                                                                                                     | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                     | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
| ** **                                                                                                     | ** ** | ** **                                    | ** ** | **As Restated** | ** ** |
| Cash flows from  operating activities:                                                                         | ** ** | ** **                                    |       | **(See Note 1)** |   |
| Net loss                                                                                                       |       | $                                             | (6,242     | ) | $ | (12,388 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities:                                   |       |                                          |       |   |   |
| Depreciation and  amortization                                                                                 |       | 3,631                                         |       | 2,615 |   |
| Stock-based  compensation                                                                                      |       | 2,124                                         |       | — |   |
| Change in  derivative instrument liability                                                                     |       | 1,016                                         |       | 4,073 |   |
| Provision for  doubtful accounts and sales returns                                                             |       | 455                                           |       | (46 | ) |
| Loss on disposal  of property and equipment                                                                    |       | 76                                            |       | 48 |   |
| Provision for  inventory reserves                                                                              |       | 56                                            |       | 138 |   |
| In-process  research and development                                                                           |       | —                                        |       | 5,640 |   |
| Deferred taxes                                                                                                 |       | (924                                          | )          | (3,195 | ) |
| Change in assets  and liabilities, net of effect of acquisition:                                               |       |                                          |       |   |   |
| Accounts  receivable                                                                                           |       | (516                                          | )          | 1,746 |   |
| Inventories                                                                                                    |       | (6,605                                        | )          | (3,782 | ) |
| Deferred product  costs                                                                                        |       | (4,026                                        | )          | (6,208 | ) |
| Prepaid expenses  and other                                                                                    |       | (18                                           | )          | 254 |   |
| Accounts payable                                                                                               |       | (772                                          | )          | 6,107 |   |
| Accrued and  other liabilities                                                                                 |       | (1,008                                        | )          | (1,198 | ) |
| Deferred revenue  and customer deposits                                                                        |       | 914                                           |       | 2,315 |   |
|                                                                                                           |       |                                          |       |   |   |
| Net cash used in  operating activities                                                                         |       | (11,839                                       | )          | (3,881 | ) |
|                                                                                                           |       |                                          |       |   |   |
| Cash flows from  investing activities:                                                                         |       |                                          |       |   |   |
| Purchase of  property and equipment                                                                            |       | (2,062                                        | )          | (1,671 | ) |
| Purchase of  short-term investments                                                                            |       | (38,218                                       | )          | (54,235 | ) |
| Proceeds from  the sale of short-term investments                                                              |       | 34,773                                        |       | 94,246 |   |
| Acquisition of  Vidus, net of cash acquired                                                                    |       | —                                        |       | (5,211 | ) |
|                                                                                                           |       |                                          |       |   |   |
| Net cash (used  in) provided by investing activities                                                           |       | (5,507                                        | )          | 33,129 |   |
|                                                                                                           |       |                                          |       |   |   |
| Cash flows from  financing activities:                                                                         |       |                                          |       |   |   |
| Proceeds from  sale of common stock                                                                            |       | 1,511                                         |       | 1,129 |   |
| Proceeds from  payment on note receivable issued to stockholder                                                |       | 2                                             |       | 3 |   |
| Excess tax  benefit on the exercise of employee stock options                                                  |       | 190                                           |       | — |   |
| Net cash  provided by financing activities                                                                     |       | 1,703                                         |       | 1,132 |   |
|                                                                                                           |       |                                          |       |   |   |
| Net  (decrease) increase in cash and cash equivalents                                                     |       | (15,643                                       | )          | 30,380 |   |
| Cash and cash  equivalents:                                                                                    |       |                                          |       |   |   |
| Beginning of  period                                                                                           |       | 25,773                                        |       | 14,494 |   |
| End of period                                                                                                  |       | $                                             | 10,130     |   | $ | 44,874 |   |
|                                                                                                           |       |                                          |       |   |   |
| Supplemental disclosure  of cash flow information:                                                             |       |                                          |       |   |   |
| Dividends  accrued on redeemable preferred stock                                                               |       | $                                             | 250        |   | $ | 181 |   |
| Change in  unrealized loss on short-term investments, net of tax effects                                       |       | $                                             | 24         |   | $ | 98 |   |
| Cash paid for  income taxes                                                                                    |       | $                                             | 80         |   | $ | 30 |   |
| Non-cash investing and  financing activities:                                                                  |       |                                          |       |   |   |
| Issuance of common  stock, redeemable preferred stock and options in connection with the  acquisition of Vidus |       | $                                             | —     |   | $ | 38,155 |   |

 

See notes tocondensed consolidated financial statements.

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**@Road, Inc.Notes To Condensed Consolidated Financial Statements**(unaudited)

**Note1 —Summary of Significant Accounting Policies**

***Restatement of Financial Statements***

Subsequentto December 31, 2005, the Company determined that its unaudited quarterlycondensed consolidated financial statements for the periods ended March 31,2005, June 30, 2005 and September 30, 2005 contained errors resulting from theimproper accounting for the common and redeemable preferred stock issued inconnection with the Company’s acquisition of Vidus Limited (“Vidus”) which wascompleted on February 18, 2005. See “Note 6—Derivative Financial InstrumentLiabilities” for further discussion.

Theimpact on the Company’s condensed consolidated statement of operations for thethree and six months ended June 30, 2005 was an increase in net loss of $3.3million and $4.1 million, respectively. As a result, the accompanying condensedconsolidated financial statements for the three and six months ended June 30,2005 have been restated from the previously reported results to correct thiserror. The following is a summary of the significant effects of the restatement(in thousands, except per share data):
|                                               | ** ** | **Three Months Ended  June 30, 2005** | ** ** | **Six Months Ended  June 30, 2005** | ** ** |
|-----------------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                    | ** ** | **As Previously  Reported**                          | ** ** | **As  Restated**                                        | ** ** | **Change** | ** ** | **As Previously  Reported** | ** ** | **As  Restated** | ** ** | **Change** | ** ** |
| Change in  derivative instrument liability    |       | $                                                         | —     |                                                    | $          | (3,332 | ) | $ | (3,332 | ) | $ | — |   | $ | (4,073 | ) | $ | (4,073 | ) |
| Total other  income (expense), net            |       | 575                                                       |       | (2,757                                                  | )          | (3,332 | ) | 1,195 |   | (2,878 | ) | (4,073 | ) |
| Net loss before income  taxes                 |       | (4,132                                                    | )          | (7,464                                                  | )          | (3,332 | ) | (11,510 | ) | (15,583 | ) | (4,073 | ) |
| Net loss                                      |       | (937                                                      | )          | (4,269                                                  | )          | (3,332 | ) | (8,315 | ) | (12,388 | ) | (4,073 | ) |
| Net loss  attributable to common stockholders |       | $                                                         | (1,061     | )                                                       | $          | (4,393 | ) | $ | (3,332 | ) | $ | (8,496 | ) | $ | (12,569 | ) | $ | (4,073 | ) |
|                                          |       |                                                      |       |                                                    |       |   |   |   |   |   |   |   |   |
| Net loss per  share:                          |       |                                                      |       |                                                    |       |   |   |   |   |   |   |   |   |
| Basic                                         |       | $                                                         | (0.02      | )                                                       | $          | (0.07 | ) | $ | (0.05 | ) | $ | (0.14 | ) | $ | (0.21 | ) | $ | (0.07 | ) |
| Diluted                                       |       | $                                                         | (0.02      | )                                                       | $          | (0.07 | ) | $ | (0.05 | ) | $ | (0.14 | ) | $ | (0.21 | ) | $ | (0.07 | ) |

 

***Basis of Consolidation and Presentation***

The accompanying condensed consolidated financialstatements include @Road, Inc. and its wholly-owned subsidiaries(collectively, the “Company”). Intercompany accounts and transactions areeliminated upon consolidation.

The accompanying condensed consolidated financialstatements were prepared by the Company, without an audit, pursuant to therules and regulations of the Securities and Exchange Commission (“SEC”).Certain information and footnote disclosures normally included in financialstatements prepared in accordance with accounting principles generally acceptedin the United States of America have been condensed or omitted pursuant to suchrules and regulations, although the Company believes the disclosures madeherein are adequate to make the information presented not misleading.

In theopinion of management, the financial statements include all adjustments,consisting only of normal recurring adjustments (except for the adjustments torestate the financial statements for the three and six months ended June 30,2005 discussed above) necessary to fairly present the financial condition,results of operations, and cash flows for the periods presented. Results ofoperations for the periods presented are not necessarily indicative of resultsto be expected for any other interim period or for the full year. Thesecondensed consolidated financial statements should be read in conjunction withthe Company’s condensed consolidated financial statements and notes thereto inits Annual Report on Form 10-K/A for the year ended December 31, 2005,dated August 9, 2006 and filed with the SEC.

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***Estimates***

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets,liabilities, revenues and expenses during the reporting period. On an on-goingbasis, the Company evaluates its estimates, including those related to revenuerecognition, stock-based compensation, intangible assets and goodwill,allowance for doubtful accounts, income taxes and legal and othercontingencies. The Company bases its estimates on historical experience and onvarious other assumptions that are believed to be reasonable under thecircumstances. Actual results could differ from those estimates.

***Certain Significant Risks and Uncertainties***

The Companyparticipates in a dynamic high-technology industry and believes that adversechanges in any of the following areas could have a material adverse effect onits future financial position, results of operations or cash flows: the abilityof the Company to integrate @Road, Ltd. (formerly Vidus) operationssuccessfully; the ability of the Company to accelerate or continue to grow as aresult of its investment initiatives; the ability of the Company and its alliancesto market, sell and support the Company solutions; the timing of purchasing andimplementation decisions by prospects and customers; competition; thedependence of the Company on mobile data systems technology, wireless networks,network infrastructure and positioning systems owned and controlled by others;advances and trends in new technologies and industry standards; marketacceptance of the Company’s existing or new solutions; development of saleschannels; changes in third-party manufacturers, key suppliers, certainstrategic or customer relationships; litigation or claims against the Companybased on intellectual property, product, regulatory or other factors; and theCompany’s ability to attract and retain employees necessary to support itsgrowth.

Motorola is thesole supplier of microcontrollers and certain modems used in the Company’sproducts. Micronet is the sole supplier of our Internet Data TerminalTM (“*i*DT”)device. Everex is the sole supplier of our Internet Location Manager—WiFi (“*i*LM®-W”) device. The Company expects torely on these suppliers as the sole source for these components and devices forthe next several years.

***Revenue Recognition***

TheCompany follows specific and detailed guidelines in recognizing revenue inaccordance with the provisions of AICPA Statement of Position 97-2, *Software Revenue Recognition*, as amendedby Statement of Position 98-4, *Deferral ofthe Effective Date of a Provision of SOP 97-2* and Statement ofPosition 98-9, *Modification of SOP 97-2*,as well as Accounting Research Bulletin No. 45, *Long-Term Construction-Type Contracts* and Statement ofPosition 81-1, *Accounting for Performance ofConstruction-Type and Certain Production-Type Contracts*. The Companyrecognizes revenue when the price is fixed and determinable, persuasiveevidence of an agreement exists, the obligations under any such agreement arefulfilled and collectibility is probable.

TheCompany’s revenues are comprised of hosted revenue and licensed revenue. Hostedrevenue is derived from monthly fees for the Company’s Field Force Management (“FFM”)and Field Asset Management (“FAM”) solutions and monthly or upfront fees forin-vehicle hardware devices enabling a mobile resource to utilize these FFM orFAM solutions. Licensed revenue is comprised of license fees, installation,training and related post-contract customer support (“PCS”) services feesrelating to the Company’s Field Service Management (“FSM”) *Taskforce*TM software solution.

Monthlyfees for the Company’s hosted solutions are recognized ratably over thecontract period, which commences (a) upon installation of the Company’sproprietary hardware devices in customers’ mobile worker vehicles, or(b) upon the creation of subscription licenses and a subscriber account onits website where subscribers have elected to use an @ Road solution with amobile telephone. Upfront fees for the Company’s hosted solution primarilyconsist of amounts for the in-vehicle enabling hardware device and peripherals,if any. The Company defers upfront fees at installation and recognizes themratably over the minimum service contract period, generally one to five years.Product costs are also deferred and amortized over such period. Renewal ratesfor the Company’s hosted solutions are not considered priced at a bargain incomparison to the upfront fees (as described in Staff Accounting BulletinNo. 104, *Revenue Recognition*).If the Company cannot objectively determine the fair value of any undeliveredelement included in hosted arrangements, it defers revenue until all elementsare delivered, all services have been performed or fair value can objectivelybe determined.

Licensed revenueassociated with the fees for the license of the Company’s FSM *Taskforce* product and relatedcustomization and installation services is generally recognized using thepercentage-of-completion method of accounting over the period that services areperformed. For agreements accounted for under the percentage-of-completionmethod, the Company determines progress to completion based on actual directlabor hours incurred to date as a percentage of the estimated total directlabor hours required to complete the project. The Company periodicallyevaluates the actual status of each project to ensure that the estimates tocomplete each contract remain accurate. A provision for estimated losses oncontracts is made in the period in which the loss becomes probable and can bereasonably estimated. To date, the Company has not incurred any such losses. Ifthe amount of revenue recognized exceeds the amount billed to customers, theexcess amount is recorded as unbilled accounts receivable. If the amount billedexceeds the amount of revenue recognized, the excess amount is recorded ascustomer deposits.

6

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TheCompany derives PCS fees from PCS agreements, which are generally initiallypurchased at the same time as a license for its *Taskforce* product. PCS can include telephone and emailsupport and the right to receive unspecified upgrades on awhen-and-if-available basis. PCS agreements may generally be renewed on anannual basis. The Company recognizes revenue for PCS, based on vendor specificobjective evidence (“VSOE”) of fair value, ratably over the term of the PCSperiod. It generally determines VSOE of PCS based on the stated fees for PCSrenewal set forth in the original license agreement. If the Company is unableto establish VSOE of fair value, it recognizes all fees ratably over the termof the PCS, when the only remaining undelivered element is PCS.

Forarrangements with multiple elements, such as licenses, customization servicesand PCS services, the Company allocates revenue to each element based upon itsfair value as determined by VSOE. VSOE for each element is based on normalpricing and discounting practices when the element is sold separately. VSOE forPCS services is measured by the stated renewal rate. If the Company cannotobjectively determine the fair value of any undelivered element included inlicense arrangements, it defers revenue until the earliest of either:(a) all elements are delivered, (b) all services have been performedor only PCS services remain to be delivered, or (c) fair value canobjectively be determined. When the fair value of a delivered element has notbeen established, the Company uses the residual method to record licenserevenue if the fair value of all undelivered elements is determinable. Underthe residual method, the fair value of the undelivered elements is deferred andthe remaining portion of the fee is allocated to the delivered elements and isrecognized as revenue, assuming all other criteria have been met.

Pursuant to Emerging Issues Taskforce Issue 06-3,*How Taxes Collected from Customers and Remitted toGovernmental Authorities Should Be Presented in the Income Statement*(“EITF 06-3”), the Company elected to present taxes collected fromcustomers and remitted to governmental authorities net in its financialstatements consistent with the Company’s historical presentation of thisinformation.

***Comprehensive Loss***

Statement of Financial Accounting Standards (“SFAS”)No. 130,*Reporting Comprehensive Income*,requires that an enterprise report, by major components and as a single total,the change in its net assets during the period from non-owner sources. Accumulated other comprehensive loss was comprised of unrealized losses of$102,000 and $78,000 on short-term investments at June 30, 2006 andDecember 31, 2005, respectively.

***Derivative Financial Instruments***

The Company doesnot use derivative instruments to hedge exposures to cash flow, market, orforeign currency risks. In accordance with SFAS No. 133, *Accounting for Derivative Instruments and HedgingActivities* (“SFAS 133”), certain derivatives embedded in ourSeries B preferred stock are bifurcated and accounted for separately. Theoriginal host instruments were initially reported, at fair value, as PreferredStock and the embedded derivatives were initially reported, at fair value, asliabilities. Because these derivatives do not qualify as hedging instruments,changes in fair values of such derivatives are reported as charges or creditsto income.

***Major Customers***

For the three and six months ended June 30, 2006AT&T Inc. represented 16% and 15%, respectively, of total revenues. For thethree and six months ended June 30, 2005, Verizon accounted for 15% and 16% oftotal revenues, respectively. During the three and six months ended June 30,2006 and 2005, no other customer represented 10% or more of total revenues.

***Recently Issued Accounting Pronouncements***

In December 2004, the Financial AccountingStandards Board (“FASB”) issued SFAS No. 123 (revised 2004),*Share-Based Payment* (“SFAS 123R”),that addresses the accounting for stock-based payment transactions in which anenterprise receives employee services in exchange for either equity instrumentsof the enterprise or liabilities that are based on the fair value of theenterprise’s equity instruments or that may be settled by the issuance of suchequity instruments. The statement eliminates the ability to account forstock-based compensation transactions using the intrinsic value method asprescribed by Accounting Principles Board (“APB”) Opinion No. 25,*Accounting for Stock Issued to Employees*(“APB25”), and generally requires that such transactions be accounted for using a fairvalue based method and recognized as expense in the condensed consolidatedstatement of operations. SFAS 123R also requires additional accounting for thetax benefit on employee stock options and for stock issued under the Company’semployee stock purchase plan. The adoption of SFAS 123R on January 1, 2006, hada material impact on the Company’s results of operations and financialposition. See “Note 9 — Employee Benefit Plans” for additional disclosurerelated to SFAS 123R.

In November 2005,the FASB issued FASB Staff Position (“FSP”) Nos. SFAS 115-1 and SFAS 124-1, *The Meaning of Other-Than-Temporary Impairment andIts Application to Certain Investments*. This FSP addresses thedetermination as to when an investment is considered impaired, whether thatimpairment is other than temporary and the measurement of an impairment loss.This FSP also includes accounting considerations subsequent to the recognitionof other-than-temporary impairments. The adoption of the FSP did not have amaterial impact on the Company’s condensed consolidated statement of operationsand financial condition.

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OnJune 7, 2005, the FASB issued SFAS No. 154, *AccountingChanges and Error Corrections*, *a replacement of APBOpinion*No. 20, *Accounting Changes,*and Statement No. 3, *Reporting AccountingChanges in Interim Financial Statements* (“SFAS 154”). SFAS 154changes the requirements for accounting and reporting a change in accountingprinciple. Previously, most voluntary changes in accounting principles were requiredto be recognized by way of a cumulative effect adjustment within net incomeduring the period of the change. SFAS 154 requires retrospective application toprior periods’ financial statements, unless it is impracticable to determineeither the period-specific effects or the cumulative effect of the change. SFAS154 is effective for accounting changes made in fiscal years beginning afterDecember 15, 2005; however, SFAS 154 does not change the transitionprovisions of any existing accounting pronouncements.

**In July 2005, the FASB issuedInterpretation No. 48, *Accounting for Uncertaintyin Income Taxes*(“FIN 48”). This interpretation prescribes acomprehensive model for how a company should recognize, measure, present, anddisclose in its financial statements uncertain tax positions that the companyhas taken or expects to take on a tax return. Under the Interpretation, thefinancial statements will reflect expected future tax consequences of suchpositions presuming the taxing authorities' full knowledge of the position andall relevant facts, but without considering time values. The Company has notyet completed its evaluation of the impact that adoption of FIN 48 willhave on the Company’s condensed consolidated statement of operations andfinancial condition.**

**Note2 — Basic and Diluted Net Loss per Share**

Basic netloss per share is computed by dividing the net loss attributable to commonstockholders for the period by the weighted average number of common sharesoutstanding during the period. Diluted net loss per share is computed bydividing the net loss attributable to common stockholders for the periodby the weighted average number of common shares and potentially dilutive commonshares outstanding during the period. Potentially dilutive common shares,composed of unvested restricted common stock and incremental common sharesissuable upon the exercise of stock options, are included in dilutednet loss per share (using the treasury stock method) to the extent suchshares are dilutive. Potentially dilutive shares that are anti-dilutive, ascalculated based on the weighted average closing price of the Company’s commonstock for the period, are excluded from the calculation of dilutednet loss per share. Common share equivalents are excluded from thecomputation in loss periods, as their effect would be anti-dilutive.

The followingtable sets forth the computation of basic and diluted net loss per share forthe periods indicated (in thousands, except per share amounts):

|                                                                   | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                        | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net loss attributable  to common stockholders (numerator)         |       | $                                               | (3,622     | )                                             | $          | (4,393 | ) | $ | (6,492 | ) | $ | (12,569 | ) |
| Shares (denominator):                                             |       |                                            |       |                                          |       |   |   |   |   |
| Basic                                                             |       |                                            |       |                                          |       |   |   |   |   |
| Weighted average  common shares outstanding                       |       | 61,527                                          |       | 60,551                                        |       | 61,363 |   | 58,977 |   |
| Weighted average  common shares outstanding subject to repurchase |       | —                                          |       | —                                        |       | — |   | — |   |
|                                                              |       |                                            |       |                                          |       |   |   |   |   |
| Shares used in  computation                                       |       | 61,527                                          |       | 60,551                                        |       | 61,363 |   | 58,977 |   |
| Diluted                                                           |       |                                            |       |                                          |       |   |   |   |   |
| Dilution impact  from option equivalent shares                    |       | —                                          |       | —                                        |       | — |   | — |   |
| Dilution impact  from employee stock purchase plan                |       | —                                          |       | —                                        |       | — |   | — |   |
| Add back  weighted average common shares subject to repurchase    |       | —                                          |       | —                                        |       | — |   | — |   |
|                                                              |       |                                            |       |                                          |       |   |   |   |   |
| Shares used in  computation                                       |       | 61,527                                          |       | 60,551                                        |       | 61,363 |   | 58,977 |   |
|                                                              |       |                                            |       |                                          |       |   |   |   |   |
| Net loss per share                                                |       |                                            |       |                                          |       |   |   |   |   |
| Basic                                                             |       | $                                               | (0.06      | )                                             | $          | (0.07 | ) | $ | (0.11 | ) | $ | (0.21 | ) |
| Diluted                                                           |       | $                                               | (0.06      | )                                             | $          | (0.07 | ) | $ | (0.11 | ) | $ | (0.21 | ) |

 

For the periodspresented, the Company had securities outstanding which could potentiallydilute basic income per share in the future, but which were excluded from thecomputation of diluted net loss per share in the periods presented, as theireffect would have been anti-dilutive due to the Company being in a lossposition or due to 

8

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outstanding options withexercise prices greater than the average fair market value for the respectiveperiods presented. Such outstanding securities consist of the following (sharesin thousands):

|                                                        | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                             | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| Outstanding options                                    |       | 3,730                                           |       | 7,019                                         |       | 4,522 |   | 6,484 |   |
| Weighted average exercise price of outstanding options |       | $                                               | 7.39       |                                          | $          | 6.02 |   | $ | 6.81 |   | $ | 6.26 |   |
|                                                        |            |                                                 |            |                                               |            |  |  |  |  |  |  |  |  |

 

**Note 3. —****Business Combinations,Goodwill and Intangible Assets**

OnFebruary 18, 2005, the Company completed the acquisition of Vidus in atransaction accounted for as a business combination using the purchase method.As consideration for the acquisition, the Company issued approximately 5.5million shares of its common stock valued at $24.7 million, newly createdredeemable preferred stock (“preferred stock”) valued at approximately$12.9 million, extinguished for cash existing debt of approximately $5.5million in exchange for all of the outstanding shares of Vidus capital stock,and issued approximately 146,000 vested options with a fair value of $531,000.Under the terms of the stock option grants, each option has been classified asa non-qualified stock option, is fully vested, has an exercise price rangingfrom $0.67 to $2.00 per share and has a one-year term. The Company incurredacquisition related costs of $2.6 million, of which $478,000 was allocated tothe issuance of common stock. The purchase price of approximately$46.3 million was allocated among the tangible and identifiable intangibleassets acquired and liabilities assumed on the basis of their estimated fairvalues on the acquisition date.

Theshares of common stock issued in the acquisition were valued in accordance withEmerging Issues Task Force Issue No. 99-12, *Determinationof the Measurement Date for the Market Price of Acquirer Securities Issued in aPurchase Business Combination* (“EITF 99-12”). In accordance withEITF 99-12, the Company established the first date on which the number of theCompany’s shares and the amount of other consideration became fixed as ofFebruary 18, 2005. Accordingly, the Company valued the transaction using theaverage closing price of the Company’s common stock for the two-day periodending on February 18, 2005, or $4.53 per share.

Theshares of redeemable preferred stock issued in the acquisition contain aprovision whereby the redemption value may be increased based on the futureprice of the Company’s common stock (the “top-up” amount) and were recorded atfair value as required by SFAS No. 141, *BusinessCombinations* (“SFAS 141”) and Emerging Issues Task Force IssueNo. 97-8, *Accounting for ContingentConsideration Issued in a Purchase Business Combination* (“EITF 97-8”).The fair value of the redeemable preferred stock was determined to be theaggregate of the redemption value of the preferred stock discounted at 6.5%,plus the estimated value of the embedded put and call options and the estimatedtop-up, discounted at the Company’s estimated cost of equity of 14.87%. See “Note6—Derivative Financial Instrument Liability” and “Note 7—Redeemable PreferredStock” for further discussion of the top-up.

Thefair value of the stock options was determined using the Black-Scholes optionpricing model with the following assumptions: no dividend yield, expectedvolatility of 96%, expected life of one year and a risk-free interest rate of3.09%.

TheVidus acquisition was accounted for under SFAS No. 141, and certain specifiedprovisions of SFAS 142. The results of operations of Vidus are included in theCompany’s Condensed Consolidated Statement of Operations beginningFebruary 19, 2005.

Thefollowing table summarizes the estimated fair values of the tangible assetsacquired and the liabilities assumed at the date of acquisition (in thousands):

| Cash                                |   | $      | 1,269  |   |
|-------------------------------------|--------|--------|--------|--------|
| Accounts receivable                 |   | 1,669  |   |
| Prepaid expenses and  other         |   | 412    |   |
| Property and equipment              |   | 1,022  |   |
| Notes receivable from  stockholder  |   | 11     |   |
| Total tangible assets  acquired     |   | 4,383  |   |
| Accounts payable                    |   | (540   | )      |
| Accrued liabilities                 |   | (2,148 | )      |
| Deferred revenue                    |   | (4,270 | )      |
| Total tangible  liabilities assumed |   | (6,958 | )      |
| Net tangible liabilities assumed    |   | $      | (2,575 | )      |

 

Under the purchase methodof accounting, the Company allocated the total purchase price to the acquirednet tangible and intangible assets based upon their fair market value as of thedate of acquisition, February 18, 2005. The intangible assets recognized,

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apart from goodwill,represented contractual or other legal rights of Vidus and those intangibleassets of Vidus that could be clearly identified. These intangible assets wereidentified and valued through interviews and analysis of data provided by Vidusconcerning development projects, their stage of development, the time andresources needed to complete them and, if applicable, their expected incomegenerating ability. There were no other contractual or other legal rights ofVidus clearly identifiable by management, other than those identified below.

The allocation of thepurchase price to the tangible and identifiable intangible assets acquired andliabilities assumed was as follows (in thousands):

| Fair value of net tangible  liabilities assumed |   | $      | (2,575 | )      |
|-------------------------------------------------|--------|--------|--------|--------|
| Intangible assets  acquired:                    |   |   |   |
| Core developed  technology                      |   | 18,410 |   |
| Order backlog                                   |   | 5,500  |   |
| Customer  relationships                         |   | 3,660  |   |
| Trademarks                                      |   | 3,250  |   |
| Trade names                                     |   | 2,270  |   |
|                                            |   | 33,090 |   |
|                                            |   |   |   |
| In-process research and  development            |   | 5,640  |   |
| Costs allocated to  common stock issued         |   | 478    |   |
| Deferred tax liability,  net                    |   | (3,693 | )      |
| Goodwill                                        |   | 13,341 |   |
| Purchase price                                  |   | $      | 46,281 |   |

 

***Core DevelopedTechnology***

Core developedtechnology of approximately $18.4 million relates to the *Taskforce* technology. At the date ofacquisition, the developed technology was complete and had reachedtechnological feasibility. Any costs to be incurred in the future will relateto the ongoing maintenance of the developed technology and will be expensed asincurred. To estimate the fair value of the developed technology, an incomeapproach was used with a discount rate of 35%, which included an analysis offuture cash flows and the risks associated with achieving such cash flows. Thedeveloped technology is being amortized over its estimated useful life of tenyears.

***Order Backlog andCustomer Relationships***

The order backlogof approximately $5.5 million and the customer relationships of approximately$3.7 million represented the fair value of the PCS obligations and existingcustomer relationships. To estimate the fair value of the order backlog and thecustomer relationships, an income approach was used with a discount rate of30%. The order backlog and customer relationships are amortized over theirestimated useful lives of three and ten years, respectively.

***Trademarks***

The*Taskforce*solution has strong namerecognition in European field service management, telecommunications, cable andutilities markets. To estimate the fair value of the trademark an incomeapproach was used with a discount rate of 40%. The Company expects to continueto produce and market the *Taskforce*product. Therefore, an analysis of various economic factors indicated theperiod of time the trademark would contribute to future cash flows. Becausecash flow is expected to continue indefinitely, the trademark is not beingamortized, but is tested for impairment at least annually and whenever eventsor changes in circumstances indicate that the carrying value may not berecoverable.

***Trade Names***

The Vidus trade name hadstrong name recognition in European markets. At the time of the acquisition,the Company expected to continue to utilize the Vidus trade name in Europe. Thefair value was determined using an income approach with a discount rate of 40%and based on an analysis of various economic factors the Company determinedthat the useful life of the trade name was indefinite. During the fourthquarter of 2005, management determined that the acquired Vidus trade name wouldno longer be utilized. As a result, the Company recorded an impairment charge of$2.3 million.

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***In-ProcessResearch and Development***

Developmentprojects that had reached technological feasibility were classified asdeveloped technology, and the value assigned to developed technology wascapitalized. In-process research and development of approximately $5.6 millionreflected research projects that had not reached technological feasibility orhad no alternative future use at the time of the acquisition and wasimmediately expensed. In order to achieve technological feasibility, the Companyestimated the hours required to complete the projects would cost approximately$5.7 million. The Company estimated the fair value assigned to in-processresearch and development using the income approach, which discounts to presentvalue the cash flows attributable to the technology once it had reachedtechnological feasibility using a discount rate of 40%. The stages ofcompletion were determined by estimating the costs and time incurred to daterelative to the costs and time expected to be incurred to develop thein-process technology into a commercially viable technology or product, whileconsidering the relative difficulty of completing the various tasks andovercoming the obstacles necessary to attain technological feasibility. Theweighted average stage of completion for all projects, in the aggregate, wasapproximately 80% as of the acquisition date. Cash flows from sales of productsincorporating those technologies commenced in fiscal 2005. Expenditures tocomplete the acquired in-process research and development approximated theoriginal estimates.

***Goodwill***

Goodwillof approximately $13.3 million represents the excess of the purchase price overthe fair value of the net tangible and intangible assets acquired. Theacquisition allows the Company to integrate its technology with Vidus’technology for dynamic scheduling, dispatching, routing and appointment bookingof mobile workers, cross-sell the companies’ solutions and further develop thecombined technologies to provide customers with seamlessly integratedsolutions. The acquisition also creates the ability to expand the Company’sbusiness to Europe and other international markets. These opportunities, alongwith the ability to hire the Vidus workforce, were significant contributingfactors to the establishment of the purchase price, resulting in therecognition of a significant amount of goodwill. The goodwill and intangibleassets were allocated to the licensed reporting segment. The goodwill is notdeductible for tax purposes.

Theresults of operations of Vidus are included in the Company’s ConsolidatedStatement of Operations from the date of the acquisition. If the Company hadacquired Vidus at the beginning of the periods presented, the Company’sunaudited pro forma revenue, net loss, net loss attributable to commonstockholders and net loss per share would have been as follows (in thousands,except per share amount):

|                                                                 | ** ** | **Six Months Ended  June 30, 2005** | ** ** |
|-----------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| Revenue                                                         |       | $                                                       | 41,311     |   |
| Net loss                                                        |       | (15,073                                                 | )          |
| Net loss attributable  to common stockholders                   |       | (15,323                                                 | )          |
| Net loss per share  (basic and diluted)                         |       | (0.25                                                   | )          |
| Shares used in computing net loss per share (basic and diluted) |       | 60,423                                                  |       |
|                                                                 |            |                                                         |            |  |

 

These results are notnecessarily indicative of what the actual results of operations would have beenif the acquisition of Vidus had in fact occurred on the dates or for theperiods indicated, nor do they purport to project the results of operations forany future periods or as of any date. These results do not give effect to anycost savings, operating synergies, and revenue enhancements which may resultfrom the acquisition of Vidus or the costs of achieving these cost savings,operating synergies, and revenue enhancements. The in-process research anddevelopment charge of approximately $5.6 million is included in the net lossattributable to common stockholders for the six months ended June 30, 2005.

***Intangible Assets***

SFAS 142 requires purchased intangible assets otherthan goodwill to be amortized over their expected useful lives unless theselives are determined to be indefinite. Purchased intangible assets are carriedat cost less accumulated amortization. Amortization is computed over theestimated useful lives of the respective assets, generally two to ten years.

11

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Intangible assets were asfollows (in thousands):
| ** **                      | ** ** | **As of June 30, 2006** | ** ** | **As of December 31, 2005** | ** ** |
|---------------------------------|------------|---------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                      | ** ** | **Carrying  Amount**                        | ** ** | **Accumulated  Amortization**                   | ** ** | **Net** | ** ** | **Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
| Amortized intangible  assets:   |       |                                        |       |                                            |       |   |   |   |   |   |   |   |   |
| Core developed  technology      |       | $                                           | 23,462     |                                            | $          | (7,561 | ) | $ | 15,901 |   | $ | 23,462 |   | $ | (6,641 | ) | $ | 16,821 |   |
| Order backlog                   |       | 5,500                                       |       | (2,499                                          | )          | 3,001 |   | 5,500 |   | (1,582 | ) | 3,918 |   |
| Customer  relationships         |       | 3,660                                       |       | (499                                            | )          | 3,161 |   | 3,660 |   | (316 | ) | 3,344 |   |
|                            |       |                                        |       |                                            |       |   |   |   |   |   |   |   |   |
| Total                           |       | 32,622                                      |       | (10,559                                         | )          | 22,063 |   | 32,622 |   | (8,539 | ) | 24,083 |   |
|                            |       |                                        |       |                                            |       |   |   |   |   |   |   |   |   |
| Unamortized intangible  assets: |       |                                        |       |                                            |       |   |   |   |   |   |   |   |   |
| Trademarks                      |       | 3,250                                       |       | —                                          |       | 3,250 |   | 3,250 |   | — |   | 3,250 |   |
|                            |       |                                        |       |                                            |       |   |   |   |   |   |   |   |   |
| Total intangible assets         |       | $                                           | 35,872     |                                            | $          | (10,559 | ) | $ | 25,313 |   | $ | 35,872 |   | $ | (8,539 | ) | $ | 27,333 |   |

 

During the fourth quarter of2005, management determined that Vidus Limited would officially change its nameto @Road, Ltd. Therefore, the acquired Vidus trade name will no longer beutilized. The name change is intended to leverage the @Road brand equity andmore closely reflect the Company’s objective of adding end-to-end MRM solutionsofferings in Europe. As a result, the Company reduced the carrying value tozero resulting in an impairment charge of $2.3 million during the three months endedDecember 31, 2005.

For the three and six months ended June 30, 2006,amortization of intangible assets was $1.0 million and $2.0 million,respectively, compared to $1.0 million and $1.5 million for the three and sixmonths ended June 30, 2005, respectively. The estimated future amortizationexpense of purchased intangible assets as of June 30, 2006 is as follows (inthousands):

| Remainder of 2006 |   | $      | 2,020  |   |
|-------------------|--------|--------|--------|--------|
| 2007              |   | 4,040  |   |
| 2008              |   | 2,458  |   |
| 2009              |   | 2,207  |   |
| 2010              |   | 2,207  |   |
| Thereafter        |   | 9,131  |   |
|              |   |   |   |
| Total             |   | $      | 22,063 |   |

 

**Note4 — Short-Term Investments**

Short-terminvestments included the following available-for-sale securities at June 30,2006 and December 31, 2005 (in thousands):

|                                  | ** ** | **As of June 30, 2006** | ** ** |
|----------------------------------|------------|---------------------------------------------|------------|
| ** **                       | ** ** | **Amortized  Cost**                         | ** ** | **Unrealized  Gains** | ** ** | **Unrealized  (Losses)** | ** ** | **Estimated  Fair Value** | ** ** |
| U.S. Government  debt securities |       | $                                           | 42,799     |   | $ | — |   | $ | (99 | ) | $ | 42,700 |   |
| Municipal debt  securities       |       | 35,434                                      |       | — |   | — |   | 35,434 |   |
| Corporate debt  securities       |       | 2,933                                       |       | — |   | (3 | ) | 2,930 |   |
|                             |       |                                        |       |   |   |   |   |   |   |
| Total                            |       | $                                           | 81,166     |   | $ | — |   | $ | (102 | ) | $ | 81,064 |   |

 

|                                  | ** ** | **As of December 31, 2005** | ** ** |
|----------------------------------|------------|-------------------------------------------------|------------|
| ** **                       | ** ** | **Amortized  Cost**                             | ** ** | **Unrealized  Gains** | ** ** | **Unrealized  (Losses)** | ** ** | **Estimated  Fair Value** | ** ** |
| U.S. Government  debt securities |       | $                                               | 39,276     |   | $ | — |   | $ | (72 | ) | $ | 39,204 |   |
| Municipal debt  securities       |       | 36,802                                          |       | — |   | (6 | ) | 36,796 |   |
| Corporate debt  securities       |       | 1,643                                           |       | — |   | — |   | 1,643 |   |
|                             |       |                                            |       |   |   |   |   |   |   |
| Total                            |       | $                                               | 77,721     |   | $ | — |   | $ | (78 | ) | $ | 77,643 |   |

 

In accordance with EITF 03-1, *The Meaning of Other-Than-Temporary Impairment andIts Application to Certain Investments*, the following table showsgross unrealized losses and fair value for those investments that were in anunrealized loss position as of June 30, 2006 and December 31, 2005, aggregatedby investment category and the length of time that individual securities havebeen in a continuous loss position (in thousands):

12

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|                                  | ** ** | **As of June 30, 2006** | ** ** |
|----------------------------------|------------|---------------------------------------------|------------|
| ** **                       | ** ** | **Less than 12 Months**      | ** ** | **12 Months or Greater** | ** ** | **Total** | ** ** |
| ** **                       | ** ** | **Fair Value**                         | ** ** | **Unrealized  Loss** | ** ** | **Fair Value** | ** ** | **Unrealized  Loss** | ** ** | **Fair Value** | ** ** | **Unrealized  Loss** | ** ** |
| U.S. Government debt  securities |       | $                                           | 42,700     |   | $ | (99 | ) | $ | — |   | $ | — |   | $ | 42,700 |   | $ | (99 | ) |
| Municipal debt  securities       |       | 35,434                                      |       | — |   | — |   | — |   | 35,434 |   | — |   |
| Corporate debt  securities       |       | 2,930                                       |       | (3 | ) | — |   | — |   | 2,930 |   | (3 | ) |
|                             |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Total                            |       | $                                           | 81,064     |   | $ | (102 | ) | $ | — |   | $ | — |   | $ | 81,064 |   | $ | (102 | ) |

 
| ** **                       | ** ** | **As of December 31, 2005** | ** ** |
|----------------------------------|------------|-------------------------------------------------|------------|
| ** **                       | ** ** | **Less than 12 Months**          | ** ** | **12 Months or Greater** | ** ** | **Total** | ** ** |
| ** **                       | ** ** | **Fair Value**                             | ** ** | **Unrealized  Loss** | ** ** | **Fair Value** | ** ** | **Unrealized  Loss** | ** ** | **Fair Value** | ** ** | **Unrealized  Loss** | ** ** |
| U.S. Government debt  securities |       | $                                               | 39,204     |   | $ | (72 | ) | $ | — |   | $ | — |   | $ | 39,204 |   | $ | (72 | ) |
| Municipal debt  securities       |       | 36,796                                          |       | (6 | ) | — |   | — |   | 36,796 |   | (6 | ) |
| Corporate debt  securities       |       | 1,643                                           |       | — |   | — |   | — |   | 1,643 |   | — |   |
|                             |       |                                            |       |   |   |   |   |   |   |   |   |   |   |
| Total                            |       | $                                               | 77,643     |   | $ | (78 | ) | $ | — |   | $ | — |   | $ | 77,643 |   | $ | (78 | ) |

 

The Company reviews investments in debt securities forother than temporary impairment whenever the fair value of an investment isless than amortized cost and evidence indicates that an investment’s carryingamount is not recoverable within a reasonable period of time. The decline invalue of these investments is primarily related to changes in interest ratesand is considered to be temporary in nature. When evaluating the investments,the Company considers whether it has the ability and intent to hold theinvestment until a market recovery and considers whether evidence indicatingthe cost of the investment is recoverable outweighs evidence to the contrary.Evidence considered in this assessment includes the reasons for the impairment,compliance with the Company’s investment policy, the severity and duration ofthe impairment, changes in the value subsequent to period-end and forecastedperformance of the investee. The Company has reviewed those securities withunrealized losses as of June 30, 2006 and December 31, 2005 forother-than-temporary impairment, and has concluded that no other-than-temporaryimpairment existed as of June 30, 2006 and December 31, 2005.

**Note5 — Balance Sheet Components**

Inventoriesconsist of raw materials, work in process and finished goods, are stated at thelower of cost (average cost) or market and consist of (in thousands): 

|                 | ** ** | **As of  June 30, 2006** | ** ** | **As of  December 31, 2005** | ** ** |
|-----------------|------------|-----------------------------------------|------------|---------------------------------------------|------------|
| Raw materials   |       | $                                       | 3,127      |                                        | $          | 1,796 |   |
| Work in process |       | 6,893                                   |       | 2,013                                       |       |
| Finished goods  |       | 2,634                                   |       | 2,278                                       |       |
|            |       |                                    |       |                                        |       |
| Total           |       | $                                       | 12,654     |                                        | $          | 6,087 |   |

 

13

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Propertyand equipment, net consist of (in thousands):
|                                            | ** ** | **As of  June 30, 2006** | ** ** | **As of  December 31, 2005** | ** ** |
|--------------------------------------------|------------|-----------------------------------------|------------|---------------------------------------------|------------|
| Computers and  software                    |       | $                                       | 15,674     |                                        | $          | 14,424 |   |
| Manufacturing  and office equipment        |       | 819                                     |       | 663                                         |       |
| Furniture and  fixtures                    |       | 383                                     |       | 455                                         |       |
| Leasehold  improvements                    |       | 1,279                                   |       | 695                                         |       |
|                                       |       |                                    |       |                                        |       |
| Total                                      |       | 18,155                                  |       | 16,237                                      |       |
| Accumulated  depreciation and amortization |       | (11,512                                 | )          | (10,042                                     | )          |
|                                       |       |                                    |       |                                        |       |
| Property and equipment,  net               |       | $                                       | 6,643      |                                        | $          | 6,195 |   |

 

Accruedliabilities consist of (in thousands):
|                                            | ** ** | **As of  June 30, 2006** | ** ** | **As of  December 31, 2005** | ** ** |
|--------------------------------------------|------------|-----------------------------------------|------------|---------------------------------------------|------------|
| Accrued  compensation and related benefits |       | $                                       | 3,615      |                                        | $          | 3,629 |   |
| Other accrued  expenses                    |       | 4,285                                   |       | 5,122                                       |       |
| Total                                      |       | $                                       | 7,900      |                                        | $          | 8,751 |   |

 

**Note6 — Derivative Financial Instrument Liabilities**

In connectionwith the Vidus acquisition, the Company issued shares of its Series B-1 and B-2redeemable preferred stock with an embedded feature indexed to the Company’scommon stock, the top-up amount, that is payable to the holders of theredeemable preferred stock upon redemption. See “Note 7—RedeemablePreferred Stock” for further discussion. In accordance with SFAS 133, thetop-up amount is considered a derivative instrument that should be bifurcatedfrom the preferred stock host and recognized as either an asset or liability,depending on the rights and obligations under the contract, and should bemeasured at fair value. The Company accounts for changes in the fair value ofthe derivative instrument, which is not designated as a hedging instrument,through the current period earnings.

TheCompany uses the Monte Carlo simulation of its stock price with the movementsin its stock price following a geometric Brownian motion to value thederivative instrument that is recorded as a derivative liability. In valuingthe embedded derivative, the Company used the market price of its common stockon the date of valuation, a historical volatility and the expected remainingperiod to the expiration date of the top-up period. The Company used thefollowing valuation assumptions:
| ** **                                   | ** ** | **As of**    | ** ** | **As of**    | ** ** | **As of**        | ** ** | **As of**    | ** ** | **As of**     | ** ** | **As of**        | ** ** |
|----------------------------------------------|------------|-------------------|------------|-------------------|------------|-----------------------|------------|-------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                   | ** ** | **June 30,** | ** ** | **March 31** | ** ** | **December 31,** | ** ** | **June 30,** | ** ** | **March 31,** | ** ** | **February 18,** | ** ** |
| ** **                                   | ** ** | **2006**          | ** ** | **2006**          | ** ** | **2005**              | ** ** | **2005**          | ** ** | **2005**           | ** ** | **2005**              | ** ** |
| Historical volatility                        |       | 43                | %          | 47                | %          | 54                    | %          | 88                | %          | 88                 | %          | 88                    | %          |
| Expected remaining  period                   |       | 3 months          |       | 6 months          |       | 9 months              |       | 12 months         |       | 15 months          |       | 15 months             |       |
| Valuation date market  price of common stock |       | $                 | 5.52       |              | $          | 5.07                  |       | $                 | 5.23       |               | $          | 2.66                  |       | $ | 4.10 |   | $ | 4.50 |   |
| Risk-free interest rate                      |       | 4.95              | %          | 4.75              | %          | 4.33                  | %          | 3.42              | %          | 3.32               | %          | 3.07                  | %          |
| Discount rate                                |       | 15.30             | %          | 15.97             | %          | 16.07                 | %          | 15.16             | %          | 15.12              | %          | 14.87                 | %          |
|                                              |            |                   |            |                   |            |                       |            |                   |            |                    |            |                       |            |  |  |  |  |  |  |

 

Thefair value of this derivative instrument was estimated at $3.9 million at June30, 2006, $4.1 million at March 31, 2006 and $2.9 million at December 31, 2005.The change in the fair value of $135,000 and $(1.0) million was recorded intotal other income (expense), net in the condensed consolidated statement ofoperations for the three and six months ended June 30, 2006, respectively. Thechange in the fair value of $(3.3) million and $(4.1) million was recorded intotal other income (expense), net in the condensed consolidated statement ofoperations for the three and six months ended June 30, 2005, respectively.

Based on the highest tenconsecutive trading days average closing price of the Company’s common stock of$5.73 per share through June 30, 2006, the aggregate top-up, as if determinedon June 30, 2006, is $7.1 million. The top-up amount will further decrease if,and to the extent that, the average closing price of our common stock for anyten consecutive trading day period ending on or before September 25, 2006 isgreater than $5.73 per share.

14

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**Note7 — Redeemable Preferred Stock**

OnFebruary 18, 2005, the Board of Directors of the Company authorized thecreation of four series of preferred stock and designated approximately 44,000,44,000, 5,000 and 5,000 shares as Series A-1, A-2, B-1 and B-2 preferredstock, respectively, of which approximately 24,000, 44,000, 5,000 and 5,000shares of Series A-1, A-2, B-1 and B-2 preferred stock, respectively, wereissued and outstanding as of June 30, 2006.

***Dividends***

The holders of the Series A-1, A-2, B-1 and B-2preferred stock are entitled to receive dividends at the rate of $6.50 pershare annually. The dividends accrue day to day, whether or not earned ordeclared, from February 18, 2005. The dividends are payable when and ifdeclared by the Board of Directors or when shares are redeemed. Anyaccumulation of unpaid dividends on the preferred stock does not bear interest.Accrued dividends totaled $686,000 as of June 30, 2006.

***Redemption***

Theholders of the Series A-1 and B-1 preferred stock may elect to redeem allor a portion of the shares at any time, and the holders of the Series A-2and B-2 preferred stock may elect to redeem all or a portion of the shares onor after February 18, 2007.

Eachshare of Series A-1 and A-2 preferred stock is redeemable for an amountequal to (i) $100 plus (ii) all declared or accumulated but unpaiddividends. Each share of Series B-1 and B-2 preferred stock is redeemablefor an amount equal to (i) $100, plus (ii) all declared oraccumulated but unpaid dividends, plus (iii) the top-up amount, if thereis no consecutive ten trading day period from September 25, 2005 to September25, 2006 during which the average per share closing price of the Company’scommon stock is greater than or equal to $7.00. The top-up amount is calculatedas follows: $54.2 million less the greater of (i) $38.0 million and (ii) thesum of 5.6 million multiplied by the highest average closing price for theCompany’s common stock for any ten consecutive trading day period fromSeptember 25, 2005 to September 25, 2006 plus $15 million.

On orafter February 18, 2009, the Company may redeem all or any portion of theSeries A-1, A-2, B-1, and B-2 preferred stock.

***Conversion***

None of the issuedseries of preferred stock is convertible.

***Liquidation***

Series A-1,A-2, B-1 and B-2 preferred stockholders are entitled to receive, uponliquidation, an amount equal to their respective redemption price. The holdersof the Series A-1, A-2, B-1 and B-2 preferred stock rank on a pari passubasis as to the receipt of such distributions and in preference to the holdersof common stock.

***Voting***

Each outstanding share ofpreferred stock is entitled to eleven (11) votes on all matters, votingwith the shares of common stock as a class.

The following table illustrates the activity for eachseries of preferred stock through June 30, 2006 (in thousands):

|                                                                           | ** ** | **Series A-1** | ** ** | **Series A-2** | ** ** | **Series B-1** | ** ** | **Series B-2** | ** ** | **Total** | ** ** |
|---------------------------------------------------------------------------|------------|----------------|------------|----------------|------------|----------------|------------|----------------|------------|-----------|------------|
| Issued at fair value                                                      |       | $              | 2,352      |           | $          | 4,424          |       | $              | 3,205      |      | $          | 2,937 |   | $ | 12,918 |   |
| Reclass of bifurcated derivative instrument, at fair value at  issuance   |       | —         |       | —         |       | (2,719         | )          | (2,451         | )          | (5,170    | )          |
| Amounts accrued for dividends for the six months ended June 30, 2005      |       | 54             |       | 103            |       | 12             |       | 12             |       | 181       |       |
| Balance June 30, 2005 (As Restated) (See Note 1)                          |       | $              | 2,406      |           | $          | 4,527          |       | $              | 498        |      | $          | 498 |   | $ | 7,929 |   |
| Amounts accrued for dividends for the six months ended December 31,  2005 |       | 77             |       | 146            |       | 16             |       | 16             |       | 255       |       |
| Balance December 31, 2005                                                 |       | $              | 2,483      |           | $          | 4,673          |       | $              | 514        |      | $          | 514 |   | $ | 8,184 |   |
| Amounts accrued for dividends for the six months ended June 30, 2006      |       | 77             |       | 143            |       | 15             |       | 15             |       | 250       |       |
| Balance June 30, 2006                                                     |       | $              | 2,560      |           | $          | 4,816          |       | $              | 529        |      | $          | 529 |   | $ | 8,434 |   |

 

15

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**Note8 — Common Stock**

The Company’s Certificate ofIncorporation, as amended, authorizes it to issue 250,000,000 shares of commonstock. At June 30, 2006 and 2005 there were no shares subject to repurchaserights.

At June 30, 2006, the Companyhad reserved approximately 16,445,000 shares of common stock available forfuture issuance under its stock option plans, including approximately 9,449,000shares related to outstanding stock options. In addition, the Company hadreserved approximately 2,108,000 shares of common stock available for futureissuance under the employee stock purchase plan.

**Note9 — Employee Benefit Plans**

***Adoptionof SFAS 123R***

The Companyadopted the provisions of SFAS 123R, on January 1, 2006. Under SFAS 123R,stock-based compensation cost is measured at the grant date, based on theestimated fair value of the award at that date, and is recognized as expenseover the employee’s requisite service period (generally over the vesting periodof the award) on a straight-line basis. The Company has no awards with marketor performance conditions. The Company adopted the provisions of SFAS 123Rusing a modified-prospective approach. Under the modified prospective approach,prior periods are not revised for comparative purposes. The valuationprovisions of SFAS 123R apply to new awards and to awards that are outstandingon the effective date and subsequently modified or cancelled. Estimatedcompensation expense for awards outstanding at the effective date will berecognized on a straight-line basis over the remaining service period using thecompensation cost calculated for pro forma disclosure purposes under SFAS 123as adjusted for estimated forfeitures. The Company has elected to follow thetax law method of determining realization of excess tax benefits in accordancewith FAS 123(R).

The effect ofrecording stock-based compensation for the three and six months ended June 30,2006 was as follows:

|                                                     | ** ** | **Three months  ended   June 30, 2006** | ** ** | **Six months   ended   June 30, 2006** | ** ** |
|-----------------------------------------------------|------------|-------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| Stock-based  compensation expense by type of award: |       |                                                        |       |                                                            |       |
| Employee stock  options                             |       | $                                                           | 906        |                                                            | $          | 1,706 |   |
| Employee stock  purchase plan                       |       | 290                                                         |       | 420                                                             |       |
| Amounts  capitalized as inventory                   |       | (1                                                          | )          | (2                                                              | )          |
| Total stock-based  compensation                     |       | $                                                           | 1,195      |                                                            | $          | 2,124 |   |
|                                                |       |                                                        |       |                                                            |       |
| Tax effect on  stock-based compensation             |       | $                                                           | 351        |                                                            | $          | 556 |   |
| Net effect on net loss                              |       | $                                                           | 844        |                                                            | $          | 1,568 |   |
|                                                |       |                                                        |       |                                                            |       |
| Effect on loss per  share:                          |       |                                                        |       |                                                            |       |
| Basic                                               |       | $                                                           | 0.01       |                                                            | $          | 0.03 |   |
| Diluted                                             |       | $                                                           | 0.01       |                                                            | $          | 0.03 |   |

 

The Company recorded $1.2million of stock-based compensation expense in its condensed consolidatedstatement of operations for the three months ended June 30, 2006. A total of$969,000 of this expense relates to prior year awards vesting after January 1,2006 and $226,000 relates to options granted after the adoption of SFAS 123R.For the six months ended June 30, 2006, the Company recorded $2.1 million ofstock-based compensation expense in its condensed consolidated statement ofoperations of which $1.9 million of this expense relates to prior year awardsvesting after January 1, 2006 and $250,000 relates to options granted after theadoption of SFAS 123R.

16

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As of June 30, 2006, there was $5.0 million of totalunrecognized compensation cost related to non-vested stock-based employeecompensation arrangements. The cost is expected to be recognized over aweighted-average period of 2.4 years. Stock-based compensation totaling $1,000and $2,000 was capitalized as inventory for the three and six months ended June30, 2006.

***Valuation Assumptions***

The weighted-average estimated fair value of employeestock options granted during the three months ended June 30, 2006 and 2005 was$3.23 and $1.29 per share, respectively. The weighted-average estimated fairvalue of employee stock options granted during the six months ended June 30,2006 and 2005 was $3.14 and $2.78 per share, respectively. The Companycalculated the fair value of each option award on the date of grant using theBlack-Scholes option pricing model with the following weighted-averageassumptions (annualized percentages):
|                           | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|---------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                | ** ** | **June 30,  2006**          | ** ** | **June 30,  2005**        | ** ** | **June 30,  2006** | ** ** | **June 30,  2005** | ** ** |
| **Stock  option plans:**  | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Volatility                |       | 68.6                             | %          | 78.0                           | %          | 69.0 | % | 91.0 | % |
| Risk-free  interest rate  |       | 5.0                              | %          | 3.7                            | %          | 4.7 | % | 3.7 | % |
| Dividend yield            |       | 0.0                              | %          | 0.0                            | %          | 0.0 | % | 0.0 | % |
| Expected life  (in years) |       | 4. 9                             |       | 2.3                            |       | 4.9 |   | 3.7 |   |
| Forfeiture rate           |       | 22.0                             | %          | 0.0                            | %          | 22.0 | % | 0.0 | % |

 
|                                     | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                          | ** ** | **June 30,  2006**          | ** ** | **June 30,  2005**        | ** ** | **June 30,  2006** | ** ** | **June 30,  2005** | ** ** |
| **Employee  stock purchase plans:** | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Volatility                          |       | 57.3                             | %          | 57.0                           | %          | 72.2 | % | 86.9 | % |
| Risk-free  interest rate            |       | 5.0                              | %          | 3.1                            | %          | 4.6 | % | 2.6 | % |
| Dividend yield                      |       | 0.0                              | %          | 0.0                            | %          | 0.0 | % | 0.0 | % |
| Expected life (in  years)           |       | 1.2                              |       | 0.5                            |       | 1.1 |   | 0.5 |   |

 

Expected volatility is determined using a 50%weighting to both historical volatility of the Company’s common stock over aperiod of 4.5 to 4.75 years following the Company’s initial public offering andimplied volatility based on the Company’s traded stock options. The risk-freeinterest rate is calculated using zero coupon rates on treasury notes strippedprincipal for each grant date given the expected life. The dividend yield ofzero is based on the fact that the Company expects to invest cash in operationsand has never paid cash dividends on common stock. The expected life iscalculated for the period from the Company’s initial public offering using theinterval between the grant date and the exercise date weighted by the number ofshares exercised. The expected life is adjusted for the anticipated behavior inrelation to unexercised options.

As stock-based compensation expense recognized in thestatement of operations for 2006 is based on awards ultimately expected tovest, it is reduced for estimated forfeitures. SFAS 123R requires forfeituresto be estimated at the time of grant and revised, if necessary, in subsequentperiods if actual forfeitures differ from those estimates. Pre-vestingforfeitures were estimated to be approximately 22% as of June 30, 2006based on weighted average historical forfeiture rates. Under the provisions ofSFAS 123R, the Company will record additional expense if the actualforfeiture rate is lower than estimated, and will record a recovery of priorexpense if the actual forfeiture is higher than estimated. In the Company’s proforma information required under SFAS 123 for the periods prior to fiscal2006, the Company accounted for forfeitures as they occurred.

***Pro Forma Information under FAS 123 forPeriods Prior to Fiscal 2006***

Prior to adopting the provisions of SFAS 123R, theCompany provided the disclosures required under SFAS 123 as amended byStatement of Financial Accounting Standards No. 148, *Accounting for Stock-Based Compensation — Transition and Disclosures*(“SFAS 148”).

For purposes of pro forma disclosures under SFAS 123for the three and six months ended June 30, 2005, the estimated fair value ofthe stock options was assumed to be amortized to expense over the stock options’vesting periods. The pro forma effects of recognizing estimated compensationexpense under the fair value method on net loss and loss per common share forthe three and six months ended June 30, 2005 were as follows:

17

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|                                                                                                               | ** ** | **Three Months Ended**                                | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                    | ** ** | **   June 30, 2005   ** | ** ** | **June 30, 2005**    | ** ** |
| Net loss as reported                                                                                          |       | $                                                               | (4,269     | )                              | $          | (12,388 | ) |
| Add: stock-based  employee compensation expense included in reported net loss, net of tax  effect             |       | —                                                          |       | —                         |       |
| Less: stock-based  employee compensation expense determined under fair value based method, net  of tax effect |       | (1,901                                                          | )          | (4,479                         | )          |
|                                                                                                          |       |                                                            |       |                           |       |
| Pro forma net loss                                                                                            |       | (6,170                                                          | )          | (16,867                        | )          |
| Preferred stock  dividends                                                                                    |       | (124                                                            | )          | (181                           | )          |
|                                                                                                          |       |                                                            |       |                           |       |
| Pro forma net loss  attributable to common stockholders                                                       |       | $                                                               | (6,294     | )                              | $          | (17,048 | ) |
|                                                                                                          |       |                                                            |       |                           |       |
| Basic net loss per  share:                                                                                    |       |                                                            |       |                           |       |
| As reported                                                                                                   |       | $                                                               | (0.07      | )                              | $          | (0.21 | ) |
|                                                                                                          |       |                                                            |       |                           |       |
| Pro forma                                                                                                     |       | $                                                               | (0.10      | )                              | $          | (0.29 | ) |
|                                                                                                          |       |                                                            |       |                           |       |
| Diluted net loss per  share:                                                                                  |       |                                                            |       |                           |       |
| As reported                                                                                                   |       | $                                                               | (0.07      | )                              | $          | (0.21 | ) |
|                                                                                                          |       |                                                            |       |                           |       |
| Pro forma                                                                                                     |       | $                                                               | (0.10      | )                              | $          | (0.29 | ) |

 

***Equity Incentive Plans***

The Company has equity incentive plans for directors,officers and employees. Stock options granted under these plans generally vest25% one year from the date of grant and the remainder vest at a rate of 2.08%per month thereafter. Grants to existing employees generally vest 25% per yearon the anniversary of the grant. Non-employee directors upon becoming a directorreceive an initial grant of options to purchase 40,000 shares vesting over4 years and annual grants of options to purchase 10,000 shares vestingover one year. Options generally expire 10 years from the date of grant.The Company’s equity incentive plans contain a provision that automaticallyincreases through 2010, on each January 1, the number of shares reservedfor issuance under these plans by the lesser of 2,500,000 shares or fourpercent of the total shares outstanding on the last day of the preceding year.

The followingtable summarizes activity under the Company’s equity incentive plans for thesix months ended June 30, 2006 (in thousands, except per share amounts):
| ** **                                    | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Life (Years)** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|-----------------------------------------------|------------|----------------------------|------------|----------------------------------------|------------|------------------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at January  1, 2006               |       | 9,571                      |       | $                                      | 4.81       |                                                             |       |                            |       |   |
| Granted                                       |       | 602                        |       | 5.18                                   |       |                                                             |       |                            |       |
| Exercised                                     |       | (221                       | )          | 2.58                                   |       |                                                             |       |                            |       |
| Canceled                                      |       | (503                       | )          | 5.49                                   |       |                                                             |       |                            |       |
| Outstanding at June 30,  2006                 |       | 9,449                      |       | $                                      | 4.85       |                                                             | 7.0        |                            | $          | 14,642 |   |
| Vested and expected to  vest at June 30, 2006 |       | 8,925                      |       | $                                      | 4.95       |                                                             | 6.9        |                            | $          | 13,867 |   |
| Options exercisable at June 30, 2006          |       | 5,570                      |       | $                                      | 5.40       |                                                             | 5.8        |                            | $          | 8,906 |   |

 

The aggregate intrinsic value is calculated as thedifference between the exercise price of the underlying awards and the quotedprice of the Company’s common stock for the 7.2 million options that werein-the-money at June 30, 2006. As of June 30, 2006, the closing price of theCompany’s common stock was $5.52 per share. In-the-money options are optionswith an exercise price lower than the $5.52 closing price. Out-of-the-moneyoptions are options with an exercise price greater than the $5.52 closingprice. The total intrinsic values of options exercised during the three and sixmonths ended June 30, 2006 was $405,000 and $598,000, respectively,

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compared to $159,000 and $274,000, respectively, forthe same periods in 2005. The intrinsic value is determined as of the date ofoption exercise. The total cash received from employees as a result of employeestock option exercises during the three months ended June 30, 2006 and 2005 wasapproximately $376,000 and $108,000, respectively. The total cash received fromemployees as a result of employee stock option exercises during the six monthsended June 30, 2006 and 2005 was approximately $570,000 and $280,000,respectively.

Additional information regarding options outstandingas of June 30, 2006 is as follows (shares in thousands):

|                                                      | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**                                     | ** ** |
|------------------------------------------------------|------------|------------------------------|------------|------------------------------------------------------------------|------------|
| **Exercise Price**                              | ** ** | **Number**                   | ** ** | **Weighted  Average  Remaining  Contractual  Life (Years)** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| $0.07  –    1.63            |       | 724                          |       | 3.9                                                              |       | $ | 1.20 |   | 724 |   | $ | 1.20 |   |
|   1.97  –    2.00 |       | 850                          |       | 5.2                                                              |       | 2.00 |   | 850 |   | 2.00 |   |
|   2.07  –    3.20 |       | 898                          |       | 8.6                                                              |       | 2.77 |   | 222 |   | 2.42 |   |
|   3.40  –    3.69 |       | 1,539                        |       | 7.3                                                              |       | 3.54 |   | 642 |   | 3.59 |   |
|   3.85   –   4.36           |       | 1,353                        |       | 8.4                                                              |       | 4.02 |   | 328 |   | 4.08 |   |
|   4.48  –    5.20      |       | 1,512                        |       | 7.3                                                              |       | 4.91 |   | 698 |   | 4.97 |   |
|   5.27  –    6.38      |       | 597                          |       | 8.4                                                              |       | 5.62 |   | 130 |   | 5.84 |   |
|   6.40  –    9.00      |       | 944                          |       | 5.8                                                              |       | 7.69 |   | 944 |   | 7.69 |   |
|   9.90  –  14.58                 |       | 1,032                        |       | 6.3                                                              |       | 11.50 |   | 1,032 |   | 11.50 |   |
|                                                 |       | 9,449                        |       | 6.9                                                              |       | $ | 4.85 |   | 5,570 |   | $ | 5.40 |   |

 

|                            | ** ** | **Options Exercisable** | ** ** | **Options Unexercisable**         | ** ** | **Total Options** | ** ** |
|----------------------------|------------|------------------------------|------------|----------------------------------------|------------|------------------------|------------|
| ** **                 | ** ** | **Number  of  Shares**       | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number  of  Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number  of  Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| In-the-money               |       | 3,484                        |       | $                                      | 2.96       |                   | 3,734      |   | $ | 3.98 |   | 7,218 |   | $ | 3.49 |   |
| Out-of-the-money           |       | 2,086                        |       | 9.48                                   |       | 145                    |       | 5.95 |   | 2,231 |   | 9.25 |   |
| Total options  outstanding |       | 5,570                        |       | $                                      | 5.40       |                   | 3,879      |   | $ | 4.06 |   | 9,449 |   | $ | 4.85 |   |

 

The Company settles employee stock option exerciseswith newly issued common shares.

***Employee Stock Purchase Plan***

The Company has an employee stock purchase plan forall eligible employees. This plan is considered compensatory underSFAS 123R. Under the plan, shares of its common stock may be purchasedover an offering period with a maximum duration of two years at 85% of thelower of the fair market value on the first day of the applicable offeringperiod or on the last day of the six-month purchase period. Employees maypurchase up to 1,800 shares having a value not exceeding 20% of their grosscompensation during an offering period. During the six months ended June 30,2005, employees purchased approximately 295,000 shares at an average price of$2.88 per share. During the six months ended June 30, 2006 and 2005, employeespurchased approximately 314,000 shares at an average price of $3.02 per share,respectively.  At June 30, 2006,approximately 2,108,000 shares of common stock were reserved for futureissuance. The Company’s employee stock purchase plan contains a provision thatautomatically increases, on each January 1, the number of shares reservedfor issuance under the employee stock purchase plan by the lesser of 900,000 ortwo percent of the total shares outstanding on the last day of the precedingyear.

***Receivable from Sales of Stock***

As a result of the Vidus acquisition, the Company hasone note receivable outstanding from an employee that is secured by commonstock. The note receivable totals $5,000 at June 30, 2006, which will be fullypaid by 2007.

***401(k) Saving and Retirement Plan***

The Company sponsors a 401(k) Saving andRetirement Plan (“Plan”) for all employees who meet certain eligibilityrequirements. Participants may contribute, on a pre-tax basis, between1 percent and 75 percent of their annual compensation, but not toexceed a maximum contribution amount pursuant to Section 401(k) ofthe Internal Revenue Code. The Company is not required to contribute, nor hasit contributed, to the Plan for any of the periods presented.

19

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**Note 10 — SegmentReporting**

Reportable segments are based upon the Company’sinternal organization structure, the manner in which the operations aremanaged, the criteria used by the Company’s chief operating decision-maker toevaluate segment performance, the availability of separate financialinformation. The Company’s chief operating decision-maker is its ChiefExecutive Officer.

Effective with the acquisition of Vidus, the Companyreports the results of its operations in two segments: Hosted and Licensed. Thesegments are managed separately because each offers different products andserves different markets. The Hosted segment provides FFM and FAM solutionsthat connect mobile workers in the field to corporate data on demand, helpmeasure overall mobile workforce performance and manage mobile assets. TheLicensed segment provides customers with the Company’s**FSM*Taskforce* solution which is designed to enable a predictable andreliable customer experience from commitment to service fulfillment; and tohelp synchronize the call center and field service operation.

The financial information used by the Company’s chiefoperating decision-maker includes net revenue from external customers, grossmargins and net loss for each of these segments.

Information aboutoperations by reporting segment is as follows (in thousands):
| ** **                                 | ** ** | **Three Months Ended June 30,** | ** ** |
|--------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                 | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| ** **                                 | ** ** | **Hosted**                                          | ** ** | **Licensed** | ** ** | **Consolidated** | ** ** | **Hosted** | ** ** | **Licensed** | ** ** | **Consolidated** | ** ** |
| Net revenue from  external customers       |       | $                                                   | 19,642     |   | $ | 3,559 |   | $ | 23,201 |   | $ | 19,685 |   | $ | 941 |   | $ | 20,626 |   |
| Cost of revenue                            |       | 11,345                                              |       | 1,127 |   | 12,472 |   | 9,227 |   | 1,473 |   | 10,700 |   |
| Intangibles  amortization                  |       | —                                              |       | 1,010 |   | 1,010 |   | — |   | 1,010 |   | 1,010 |   |
|                                       |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Gross margin                               |       | $                                                   | 8,297      |   | $ | 1,422 |   | $ | 9,719 |   | $ | 10,458 |   | $ | (1,542 | ) | $ | 8,916 |   |
|                                       |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Gross margin percentage                    |       | 42                                                  | %          | 40 | % | 42 | % | 53 | % | (164 | )% | 43 | % |
|                                       |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Net loss before income  taxes              |       | $                                                   | (641       | ) | $ | (3,177 | ) | $ | (3,818 | ) | $ | (1,440 | ) | $ | (6,024 | ) | $ | (7,464 | ) |
| (Provision for) benefit  from income taxes |       | (580                                                | )          | 902 |   | 322 |   | — |   | 3,195 |   | 3,195 |   |
|                                       |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Net loss                                   |       | $                                                   | (1,221     | ) | $ | (2,275 | ) | $ | (3,496 | ) | $ | (1,440 | ) | $ | (2,829 | ) | $ | (4,269 | ) |
|                                       |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Depreciation                               |       | $                                                   | 637        |   | $ | 180 |   | $ | 817 |   | $ | 459 |   | $ | 147 |   | $ | 606 |   |

 
| ** **                                 | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                 | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| ** **                                 | ** ** | **Hosted**                                        | ** ** | **Licensed** | ** ** | **Consolidated** | ** ** | **Hosted** | ** ** | **Licensed** | ** ** | **Consolidated** | ** ** |
| Net revenue from  external customers       |       | $                                                 | 40,605     |   | $ | 7,341 |   | $ | 47,946 |   | $ | 39,175 |   | $ | 1,443 |   | $ | 40,618 |   |
| Cost of revenue                            |       | 22,347                                            |       | 2,357 |   | 24,704 |   | 18,751 |   | 2,173 |   | 20,924 |   |
| Intangibles  amortization                  |       | —                                            |       | 2,020 |   | 2,020 |   | — |   | 1,467 |   | 1,467 |   |
|                                       |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| Gross margin                               |       | $                                                 | 18,258     |   | $ | 2,964 |   | $ | 21,222 |   | $ | 20,424 |   | $ | (2,197 | ) | $ | 18,227 |   |
|                                       |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| Gross margin percentage                    |       | 45                                                | %          | 40 | % | 44 | % | 52 | % | (152 | )% | 45 | % |
|                                       |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| Net loss before income  taxes              |       | $                                                 | (1,592     | ) | $ | (5,384 | ) | $ | (6,976 | ) | $ | (1,804 | ) | $ | (13,779 | ) | $ | (15,583 | ) |
| (Provision for) benefit  from income taxes |       | (1,170                                            | )          | 1,904 |   | 734 |   | — |   | 3,195 |   | 3,195 |   |
|                                       |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| Net loss                                   |       | $                                                 | (2,762     | ) | $ | (3,480 | ) | $ | (6,242 | ) | $ | (1,804 | ) | $ | (10,584 | ) | $ | (12,388 | ) |
|                                       |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| Depreciation                               |       | $                                                 | 1,242      |   | $ | 369 |   | $ | 1,611 |   | $ | 944 |   | $ | 204 |   | $ | 1,148 |   |

 

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Revenues are attributed to countries based on thelocation of the customer.  The distribution of revenue by geographic areawas summarized as follows (in thousands):

|                                           | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Revenue from Unaffiliated  Customers:** | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| United States  and Canada                 |       | $                                               | 19,645     |                                          | $          | 19,685 |   | $ | 40,608 |   | $ | 39,175 |   |
| Europe                                    |       | 3,556                                           |       | 941                                           |       | 7,338 |   | 1,443 |   |
|                                      |       | $                                               | 23,201     |                                          | $          | 20,626 |   | $ | 47,946 |   | $ | 40,618 |   |

 

Long-lived assets are allocated among geographiesbased upon the country in which the long-lived asset is located or owned.

The distributionof long-lived assets by geographic area was summarized as follows (inthousands):

|                             | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                  | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| **Long-Lived Assets, Net:** | ** ** | ** **        | ** ** | ** **            | ** ** |
| United States               |       | $                 | 4,970      |                  | $          | 5,184 |   |
| United Kingdom              |       | 39,575            |       | 41,773                |       |
| India                       |       | 1,416             |       | 312                   |       |
|                        |       |              |       |                  |       |
|                        |       | $                 | 45,961     |                  | $          | 47,269 |   |

 

**Note 11 —Commitments and Contingencies**

***Lease Commitments***

The followingtable represents the future minimum lease payments under non-cancelableoperating and capital leases as of June 30, 2006 (in thousands).

| Remainder of 2006            |   | $     | 1,048  |   |
|------------------------------|--------|-------|--------|--------|
| 2007                         |   | 2,006 |   |
| 2008                         |   | 1,798 |   |
| 2009                         |   | 1,747 |   |
| 2010                         |   | 1,044 |   |
| Thereafter                   |   | 634   |   |
| Total minimum lease payments |   | $     | 8,277  |   |

 

The Company recognizes rent expense on a straight-linebasis over the lease period and has accrued for rent expense incurred but notpaid. Rent expense was approximately $578,000 and $606,000 for the three monthsended June 30, 2006 and 2005, respectively, and approximately $1.1 million and$1.3 million for the six months ended June 30, 2006 and 2005, respectively.

The Company has future minimum lease payments forcapital and financing leases for office equipment and furniture in the amountof $70,000 included in the table above.

On February 1, 2006, the Company entered into alease for its future research and development and customer service center fromFebruary 2006 through January 2009, occupying 37,910 square feet inChennai India. The total minimum future lease payments are included in thetable above.

***Purchase Commitments***

At June 30, 2006, the Company had non-cancelableinventory purchase commitments totaling approximately $9.0 million and otherpurchase obligations totaling approximately $4.7 million.

21

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***Legal Proceedings***

From time to time, the Company is subject to claims inlegal proceedings arising in the normal course of business. Based on evaluationof these matters, the Company believes that these matters will not have amaterial effect on the results of operations or financial position of theCompany.

***Other Contingencies***

The Company from time to time enters into certaintypes of agreements that contingently require it to indemnify parties againstthird party claims. These agreements primarily relate to: (i) certainagreements with the Company’s officers, directors and employees and thirdparties, under which the Company may be required to indemnify such persons forliabilities arising out of their duties to the Company and (ii) certainagreements under which the Company indemnifies customers and other third partiesfor claims such as those arising from intellectual property infringement,personal injury, or non-performance under the agreement. Certain of the Company’s strategic allianceagreements include liquidated damages in relation to a change in control. Such indemnification andliquidated damages provisions are accounted for in accordance with SFASNo. 5,*Accounting for Contingencies*.To date, the Company has not incurred any costs related to any claims undersuch indemnification or liquidateddamages provisions.

In general, the Company provides its customers a12-month limited warranty that the hardware furnished under the hostedagreements will be free from defects in materials and workmanship and willsubstantially conform to the specifications for such hardware. The Company’spolicy is to expense such costs as incurred. To date, the Company has incurredminimal costs related to this limited warranty obligation. The Company alsoprovides its European customers with the longer of the European Union statutorywarranty of 90 days or country specific warranty of up to 365 days. If thewarranty is invoked, the Company may be required to correct errors in itssoftware rather than refund any fees under the arrangement. As of June 30,2006, this warranty has not been invoked by any of the Company’s customers.

**Item 2.Management’s Discussion and Analysis of Financial Condition and Results ofOperations.**

The following discussion should be read in conjunctionwith the condensed consolidated financial statements and the related notesincluded in this Quarterly Report on Form 10-Q, in our Quarterly Report on Form10-Q/A for the three months ended March 31, 2006, in our Annual Report on Form10-K/A for the year ended December 31, 2005 and in our other filings with theSEC. Except for the historical information contained herein, the mattersdiscussed in this Quarterly Report on Form 10-Q are forward-looking statementsinvolving risks and uncertainties that could cause actual results to differmaterially from those in such forward-looking statements. Numerous factors,risks and uncertainties affect our operating results and could cause our actualresults to differ materially from forecasts and estimates or from any otherforward-looking statements made by us or on our behalf and there can be noassurance that future results will meet expectations, estimates or projections.Further information regarding these and other risks is included in thisQuarterly Report on Form 10-Q under the section below entitled “Factors thatCould Affect Future Results,” elsewhere in this Quarterly Report on form 10-Qand in our other filings with the SEC.

**Overview**

We are a leadingprovider of mobile resource management (“MRM”) solutions, a category ofbusiness productivity solutions designed to enable the effective management ofmobile resources. Our MRM solutions allow customers to improve productivity byenabling the effective management of the activities of their mobile workers,assets, goods and services. Currently, we market and sell our solutions to arange of customers in North America and Europe. We offer Field Force Management(“FFM”) solutions, including our GeoManagerSM, PathwaySM and PorticoSM solutions, designed to help companies bettermanage their mobile workers; Field

22

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Service Management (“FSM”) solutions, such as ourTaskforceTM software, designed to help companies bettermanage their mobile workers’ work; and Field Asset Management (“FAM”)solutions, such as Vehicle Diagnostics and StatusSensors, designed to helpcompanies better manage their mobile workers’ assets in the field. At June 30,2006, approximately 183,000 mobile resources were enabled with our solutions,on either a subscription or a per seat license basis.

We report the results of our operations in twosegments: Hosted and Licensed. The segments are managed separately because eachoffers different products and serves different segments of the market. TheHosted segment provides the FFM and FAM solutions that connect mobile workersin the field to corporate data on demand, help measure overall mobile workforceperformance and manage mobile assets. The Licensed segment provides customerswith our FSM solution, which is designed to enable a predictable and reliablecustomer experience from commitment to service fulfillment; and to helpsynchronize the call center and field service operation.

Subsequent to December 31, 2005, we determined thatour condensed consolidated financial statements contained errors resulting fromthe improper accounting for the common and redeemable preferred stock issued inconnection with the Vidus acquisition. Accordingly, the unaudited quarterlyfinancial data for the three and six months ended June 30, 2005 presentedherein has been restated. The impact on our condensed consolidated statement ofoperations for the three and six months ended June 30, 2005 was an increase innet loss of $3.3 million and $4.1 million, respectively.

The accompanying Management’s Discussion and Analysisof Financial Condition and Results of Operations gives effect to thisrestatement as described in “Note 1 — Summary of Significant AccountingPolicies, Restatement of Financial Statements” to the condensed consolidatedfinancial statements.

**CriticalAccounting Policies, Judgments and Estimates**

***General***

The accompanying discussion and analysis of ourfinancial condition and results of operations are based on our condensedconsolidated financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States of America. Webelieve there are several accounting policies that are critical tounderstanding our condensed consolidated financial statements as these policiesaffect the reported amounts of revenue and expenses and involve management’sjudgment regarding significant estimates. We have based our estimates onhistorical experience and on various other assumptions that are believed to bereasonable under the circumstances, the results of which form the basis formaking judgments about the carrying values of assets and liabilities that arenot readily apparent from other sources. Our senior management has reviewed ourcritical accounting policies and their application in the preparation of ourfinancial statements and related disclosures and discussed the development,selection and disclosure of significant estimates with the Audit Committee ofour Board of Directors. To the extent that actual results differ from thoseestimates, our future results of operations may be affected.

***Revenue Recognition***

We follow specific and detailed guidelines inrecognizing revenue in accordance with the provisions of AICPA Statement ofPosition 97-2, *Software Revenue Recognition*,as amended by Statement of Position 98-4, *Deferralof the Effective Date of a Provision of SOP 97-2*and Statement ofPosition 98-9, *Modification of SOP 97-2,Software Revenue Recognition, With Respect to Certain Transactions*,as well as Accounting Research Bulletin No. 45, *Long-Term Construction-Type Contracts*and Statement ofPosition 81-1*, Accounting for Performance ofConstruction-Type and Certain Production-Type Contracts.*Werecognize revenue when the price is fixed and determinable, persuasive evidenceof an agreement exists, our obligations under any such agreement are fulfilledand collectibility is probable.

Our revenues are comprised of hosted revenue andlicensed revenue. Hosted revenue is derived from monthly fees for our FFM andFAM solutions and monthly or upfront fees for in-vehicle hardware devicesenabling a mobile resource to utilize these FFM or FAM solutions. Licensedrevenue is comprised of license fees, installation, training and relatedpost-contract customer support (“PCS”) service fees relating to our FSMsolution.

Monthly fees for our hosted solutions are recognizedratably over the contract period, which commences (a) upon installation of ourproprietary hardware devices in our customer’s mobile worker vehicles or (b)upon the creation of subscription licenses and a customer account on ourwebsite where customers have elected to use our solution with a mobiletelephone. Upfront fees for our hosted solution primarily consist of amountsfor the in-vehicle enabling hardware device and peripherals, if any. We deferupfront fees at installation and recognize them ratably over the minimumservice contract period, generally one to five years. Product costs are alsodeferred and amortized over such period. Renewal rates for our hosted solutionsare not considered priced at a bargain in comparison to the upfront fees (asdescribed in Staff Accounting Bulletin No. 104, *Revenue Recognition*). If we cannot objectively determine thefair value of any undelivered element included in hosted arrangements, we deferrevenue until all elements are delivered, all services have been performed orfair value can objectively be determined.

23

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Licensed revenue associated with the fees for thelicense of our Taskforce product and related customization and installationservices is generally recognized using the percentage-of-completion method ofaccounting over the period that services are performed. For agreementsaccounted for under the percentage-of-completion method, we determine progressto completion based on actual direct labor hours incurred to date as apercentage of the estimated total direct labor hours required to complete theproject. We periodically evaluate the actual status of each project to ensure thatthe estimates to complete each contract remain accurate. A provision forestimated losses on contracts is made in the period in which the loss becomesprobable and can be reasonably estimated. To date, we have not incurred anysuch losses.

If the amount of licensed revenue recognized under thepercentage of completion method exceeds the amount billed to customers, theexcess amount is recorded as unbilled accounts receivable. If the amount billedexceeds the amount of revenue recognized, the excess amount is recorded ascustomer deposits.

Revenue recognizedin any period is dependent on our progress toward completion of projects inprogress. For projects that were in progress and not complete as of June 30,2006 and 2005, the following table illustrates the total direct labor hoursincurred as a percentage of estimated total direct labor hours required tocomplete these projects.

|                                                                                                                        | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                             | ** ** | **  2006  **              | ** ** | **  2005  ** | ** ** |
| Total direct labor  hours incurred to date as a % of estimated total direct labor hours required  to complete projects |       | 80                                            | %          | — | % |

 

Significant management judgment and discretion areused to estimate total direct labor hours. Any changes in or deviations fromthese estimates could have a material effect on the amount of revenue werecognize in any period. Based on our results for the three and six monthsended June 30, 2006, a ten percent deviation from our estimated total directlabor hours required to complete projects uncompleted at June 30, 2006 would haveresulted in an insignificant increase or decrease in net loss attributable tocommon stockholders.

We derive PCS fees from PCS agreements, which aregenerally initially purchased at the same time as a license for our Taskforceproduct. PCS can include telephone and email support and the right to receiveunspecified upgrades on a when-and-if-available basis. PCS agreements maygenerally be renewed on an annual basis. We recognize revenue for PCS based onvendor specific objective evidence (“VSOE”) of fair value ratably over the termof the PCS period. We generally determine VSOE of PCS based on the stated feesfor PCS renewal set forth in the original license agreement. If we are unableto establish VSOE of fair value, we recognize the entire arrangement feeratably over the term of the PCS, when the only remaining undelivered elementis PCS.

For arrangements with multiple elements, such aslicenses, customization services and PCS services, we allocate revenue to eachelement based upon its fair value as determined by VSOE. VSOE for each elementis based on normal pricing and discounting practices when the element is soldseparately. VSOE for PCS services is measured by the stated renewal rate. If wecannot objectively determine the fair value of any undelivered element includedin license arrangements, we defer revenue until the earliest to occur of thefollowing: (a) all elements are delivered, (b) all services have been performedor only PCS services remain to be delivered, or (c) fair value can objectivelybe determined. When the fair value of a delivered element has not beenestablished, we use the residual method to record license revenue if the fairvalue of all undelivered elements is determinable. Under the residual method,the fair value of the undelivered elements is deferred and the remainingportion of the fee is allocated to the delivered elements and is recognized asrevenue assuming all other criteria have been met.

***Pursuant to Emerging Issues TaskforceIssue 06-3,***HowTaxes Collected from Customers and Remitted to Governmental Authorities ShouldBe Presented in the Income Statement (“EITF 06-3”), we elected to present taxes collectedfrom customers and remitted to governmental authorities net in its financialstatements consistent with our historical presentation of this information.

***Stock-based Compensation***

We adopted the provisions of Statement of FinancialAccounting Standards (“SFAS”) No. 123 (revised), *Share-Based Payment* (“SFAS 123R”), on January 1, 2006.During the three and six months ended June 30, 2006, we recorded stock-basedcompensation expense of $1.2 million and $2.1 million, respectively, inaccordance with SFAS 123R. The current period stock-based compensationrecognized is based on the amortization of the fair value of stock options asdetermined on their date of grant using a Black-Scholes option valuation model.The estimate of fair value under the Black-Scholes option valuation model isbased upon certain assumptions including stock price volatility, risk-freeinterest rate, dividend yield, expected life in years and forfeiture rate.

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Expectedvolatility for the three and six months ended June 30, 2006 of 68.6% and 69.1%,respectively, is determined using a 50% weighting for both historicalvolatility of our common stock over a period of 4.5 to 4.75 years following ourinitial public offering and implied volatility based on our traded stockoptions. If our stock price volatility were to change by 10%, the weightedaverage estimated fair value of stock options granted during the three and sixmonths ended June 30, 2006 would change by 7% and 6%, respectively.

The expected life for the three and six months endedJune 30, 2006 of 4.9 years and 5.0 years, respectively, is calculated for theperiod from our initial public offering using the interval between the grantdate and the exercise date weighted by the number of shares exercised. Theexpected life is adjusted for the anticipated behavior in relation tounexercised options. If the expected life were to change by 10%, the weightedaverage estimated fair value of stock options granted during the three and sixmonths ended June 30, 2006 would change by 4% and 4%, respectively.

We arerequired to estimate the expected forfeiture rate and only recognize expensefor those shares expected to vest. The forfeiture rate for the three and sixmonths ended June 30, 2006 is 22%, calculated based on a weighted averagehistorical forfeiture rate. If the actual forfeiture rate is higher than theoriginal estimate, we will record a recovery of prior expense. If the actualforfeiture rate is lower than the original estimate, we will record additionalexpense.

The Company has elected to follow the tax law methodof determining realization of excess tax benefits in accordance with SFAS123(R).

Theseassumptions represent management’s best estimates, but these estimates involveinherent uncertainties and the application of management judgment. As a result,if other assumptions had been used, our recorded and pro forma stock-basedcompensation expense could have been materially different from that depictedabove.

***Valuation of Intangible Assets and Goodwill***

In accordance withthe provisions of SFAS No. 141, *BusinessCombinations*(“SFAS 141”), the purchase price of an acquired companyis allocated between intangible assets and the net tangible assets of theacquired business with the residual of the purchase price recorded as goodwill.The determination of the value of the intangible assets acquired and theirexpected lives involves certain judgments and estimates. These judgments caninclude, but are not limited to, the cash flows that an asset is expected togenerate in the future and the appropriate weighted average cost of capital.

At June 30, 2006,our goodwill totaled $13.3 million and our identifiable intangible assetstotaled $25.3 million. In accordance with the provisions of SFAS 142, *Goodwill and Other Intangible Assets*, weassess the impairment of goodwill and indefinite lived identifiable intangibleassets of our reporting units at least annually, or more often if events orchanges in circumstances indicate that the carrying value may not berecoverable. This assessment is based upon a discounted cash flow analysis andanalysis of our market capitalization. The estimate of cash flow is based upon,among other things, certain assumptions about expected future operatingperformance and an appropriate discount rate determined by our management. Ourestimates of discounted cash flows may differ from actual cash flows due to,among other things, economic conditions, changes to the business model orchanges in operating performance.

Significantdifferences between these estimates and actual cash flows could materiallyaffect our future financial results. We conducted our initial annual impairmenttest as of August 31, 2005 and determined there was no impairment. During thefourth quarter of 2005, we determined that the acquired Vidus trade name wasimpaired and as a result, reduced the carrying value of the trade name to zero.There were no events or circumstances during the three and six months endedJune 30, 2006 indicating that a further assessment was necessary.

***Allowance for Doubtful Accounts***

Historically, wehave had a significant number of small- to medium-sized companies utilizing oursolutions. These customers are involved in diverse businesses. Our paymentarrangements with customers generally provide 30 to 45 day payment terms. Whencustomers contract with us, we assess their creditworthiness.

The nature of ourrelationship with customers is inherently long-term and we have extended andmay extend payment terms on an exception basis. We regularly review ourcustomers’ ability to satisfy their payment obligations and provide anallowance for doubtful accounts for specific receivables that we believe arenot collectible. When these conditions arise, we suspend recognition of revenueuntil collection becomes probable or cash is collected. Beyond these specificcustomer accounts, we record an allowance based on the

25

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size and age of allreceivable balances against which we have not established a specific allowance,current economic trends and historical experience with collections. Thefollowing table illustrates the allowance for doubtful accounts as a percentageof gross accounts receivable as of June 30, 2006 and December 31, 2005:

|                                                                    | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                         | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| Gross accounts  receivable                                         |       | $                 | 13,107     |                  | $          | 12,851 |   |
| Allowance for doubtful  accounts                                   |       | $                 | 571        |                  | $          | 376 |   |
| Allowance for doubtful accounts as a% of gross accounts receivable |       | 4.4               | %          | 2.9                   | %          |

 

Historically, ouractual losses and credits have been consistent with these provisions. Webelieve that we can make reliable estimates for doubtful accounts; however, thesize and diversity of our customer base, as well as overall economicconditions, may affect our ability to accurately estimate bad debt expense.Based on our results for the three and six months ended June 30, 2006, a tenbasis point deviation in the allowance for doubtful accounts as a percentage ofgross accounts receivable would have resulted in an insignificant increase ordecrease in net loss attributable to common stockholders.

***Deferred Tax Assets***

We havesubstantial deferred tax assets that relate to prior periods’ losses, primarilyin the United States and the United Kingdom. We evaluate these deferred taxassets in each tax jurisdiction by estimating the likelihood of generatingfuture profits to realize these assets. In both jurisdictions, we haveconcluded that it is more likely than not that we will generate sufficientfuture taxable income to realize these deferred tax assets. A valuationallowance has been established for deferred tax assets which we do not believemeet the more likely than not criteria established by Statement of FinancialAccount Standards No. 109, *Accounting forIncome Taxes.*This evaluation of whether it is more likely than notthat such deferred tax assets will be realized must be continuously evaluateddue to changes in market conditions, changes in tax laws, tax planningstrategies or other factors. To the extent we establish a valuation allowanceor change the allowance in a period, we reflect the change with a correspondingincrease or decrease in our tax provision in our condensed consolidatedstatement of operations. At June 30, 2006, we maintained an allowance oncertain state net operating losses and state tax credits based on ourassessment that it is more likely than not that the deferred tax asset relatedto these items will not be realized. The deferred tax asset, net of a valuationallowance of $344,000, totaled $48.1 million as of June 30, 2006 and waspartially offset by deferred tax liabilities of $6.2 million.

**RESULTSOF OPERATIONS**

**Thethree and six months ended June 30, 2006 and 2005.**

***Hosted revenue, cost of hosted revenue, hosted gross margin***

|                                | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                     | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                     | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Hosted revenue                 |       | $                                               | 19,642     |                                          | $          | 19,685 |   | $ | 40,605 |   | $ | 39,175 |   |
|                           |       |                                            |       |                                          |       |   |   |   |   |
| Cost of hosted revenue         |       | 11,345                                          |       | 9,227                                         |       | 22,347 |   | 18,751 |   |
| ** **                     | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Hosted gross margin            |       | $                                               | 8,297      |                                          | $          | 10,458 |   | $ | 18,258 |   | $ | 20,424 |   |
|                           |       |                                            |       |                                          |       |   |   |   |   |
| Hosted gross margin percentage |       | 42                                              | %          | 53                                            | %          | 45 | % | 52 | % |

 

***Hosted revenue***

|                                   | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                        | ** ** | **2006**                                        | ** ** | **Percent  Change**                           | ** ** | **2005** | ** ** | **2006** | ** ** | **Percent  Change** | ** ** | **2005** | ** ** |
| ** **                        | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Hosted revenue                    |       | $                                               | 19,642     |                                          | 0          | % | $ | 19,685 |   | $ | 40,605 |   | 4 | % | $ | 39,175 |   |
| As a percentage of total revenues |       | 85                                              | %          |                                          |       | 95 | % | 85 | % |   |   | 96 | % |
|                                   |            |                                                 |            |                                               |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

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Hosted revenue iscomprised of monthly fees for our FFM and FAM solutions, and monthly or upfrontfees for in-vehicle hardware devices enabling a mobile resource to utilizethese FFM and FAM solutions. Our hosted revenue is affected by a number offactors, including subscriber growth, the rate at which service features oradd-ons are adopted, the pricing associated with the size and term ofsubscriber contracts and purchases of our in-vehicle hardware devices. Giventhe generally fixed nature of our arrangements with our subscribers and ratablerevenue recognition, the impact on revenues of changes in current prices forhosted solutions is tempered. This is because revenues from new pricing arelayered on top of revenues from existing subscribers.

As new subscriberspurchase our in-vehicle hardware devices or as existing subscribers choose topurchase new in-vehicle hardware devices, the amount of deferred revenuerecognized ratably over the expected life of the subscriber increases. Thiseffect is tempered by subscribers purchasing solutions that are deployedthrough the use of a mobile telephone installed with our software applicationbecause we do not sell those devices and, therefore, do not recognize anyrevenues from sales of mobile telephones. A similar tempering effect may occurwhen a subscriber exceeds its initial contract period because recognition ofdeferred revenue is complete.

We describearrangements in which customers contract directly with wireless carriers forthe wireless airtime component of our solutions as “unbundled.” Conversely, wedescribe arrangements in which we contract directly with customers for thewireless airtime portion as “bundled.” The nature of our relationship with thewireless carriers dictates whether we will be entering into a bundled orunbundled arrangement with a customer. Selection of the appropriate protocol isrelated primarily to optimal wireless coverage for a specific subscriber areaof operation. We have observed an increase in the proportion of new subscribersbeing added on an unbundled basis, resulting in decreased revenue from suchsubscribers. Unbundled subscribers represented approximately 62% and 55% of ourtotal subscribers at June 30, 2006 and 2005, respectively. We expect that thistrend will continue through the next 12 to 18 months.

For the threemonths ended June 30, 2006 compared to the three months ended June 30, 2005,hosted revenue remained flat as the increase in the number of subscribers usingour solutions was offset by a decrease in revenue per subscriber. For the sixmonths ended June 30, 2006 compared to the six months ended June 30, 2005,hosted revenue increased primarily as a result of an increase in the number ofsubscribers using our solutions, partially offset by a decrease in revenue persubscriber. The total number of subscribers using our solutions wasapproximately 151,000 and 140,000 at June 30, 2006 and 2005, respectively. Asof June 30, 2006 and 2005, 82% and 73% of our subscribers were under long termcontracts, respectively. Average monthly hosted revenue per subscription wasapproximately $44.25 for the three months ended June 30, 2006, down from $48.15for the same period in 2005. The decrease of $3.90 is primarily the result ofnew subscribers being added utilizing an unbundled arrangement. Average monthlyhosted revenue per subscription was approximately $45.92 for the six monthsended June 30, 2006, down from $48.41 for the same period in 2005. The decreaseof $2.49 is primarily the result of new subscribers being added utilizing anunbundled arrangement.

***Cost of hosted revenue***

|                                    | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------|------------|--------------------------------------------|------------|-------------------------------------|------------|
| ** **                         | ** ** | **2006**                                   | ** ** | **Percent  Change**                 | ** ** | **2005** | ** ** | **2006** | ** ** | **Percent  Change** | ** ** | **2005** | ** ** |
| ** **                         | ** ** | ** **                                 | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cost of hosted revenue             |       | $                                          | 11,345     |                                | 23         | % | $ | 9,227 |   | $ | 22,347 |   | 19 | % | $ | 18,751 |   |
| As a percentage of hosted revenues |       | 58                                         | %          |                                |       | 47 | % | 55 | % |   |   | 48 | % |
|                                    |            |                                            |            |                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Cost of hostedrevenue consists of the amortization of the deferred cost of the in-vehicleenabling hardware devices; costs associated with the final assembly, testing,provision, delivery and installation of hardware and other costs such asprovisions for inventory and repair costs; and expenses related to the deliveryand support of our solutions. For the three months ended June 30, 2006 comparedto the three months ended June 30, 2005, cost of hosted revenue increasedprimarily as a result of increases in amortization of deferred product costs of$844,000, warranty and repair charges of $382,000, employee-related expenses of$370,000, airtime usage of $212,000, employee stock based compensation expenseas a result of the adoption of SFAS 123R of $137,000, IT support costs of$120,000 and equipment depreciation of $119,000.

For the six monthsended June 30, 2006 compared to the six months ended June 30, 2005, cost ofhosted revenue increased primarily as a result of increases in amortization ofdeferred product costs of $1.4 million, warranty and repair charges of $1.2million, employee-related expenses of $962,000, employee stock basedcompensation expense as a result of the adoption of SFAS 123R of $222,000 andequipment depreciation of $219,000, partially offset by a decrease in airtimeusage of $386,000.

Cost of hostedrevenue headcount increased to 216 at June 30, 2006 from 209 at June 30, 2005.We expect cost of hosted revenue to increase during the next 12 months,primarily resulting from headcount increases.

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***Hosted gross margin***

|                                    | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                         | ** ** | **2006**                                        | ** ** | **Percent  Change**                           | ** ** | **2005** | ** ** | **2006** | ** ** | **Percent  Change** | ** ** | **2005** | ** ** |
| ** **                         | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Hosted gross margin                |       | $                                               | 8,297      |                                          | (21        | )% | $ | 10,458 |   | $ | 18,258 |   | (11 | )% | $ | 20,424 |   |
| As a percentage of hosted revenues |       | 42                                              | %          |                                          |       | 53 | % | 45 | % |   |   | 52 | % |
|                                    |            |                                                 |            |                                               |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

For the three andsix months ended June 30, 2006 compared to the comparable periods for 2005,hosted gross margins decreased due to the loss of Verizon as a customer, afixed cost base and higher warranty and repair costs on our continuingcustomers.

Direct expensesgenerally increase at a rate proportional to the growth in our subscribers. Personnelcosts and depreciation expense generally increase at a rate slower than thegrowth rate of our subscribers. As a result, we expect that our hosted grossmargin will increase during the next 12 months.

***Licensed revenue, cost of licensed revenue and licensedgross margin***

Licensed grossmargin is calculated as follows:

|                                                                               | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                    | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                    | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Licensed revenue                                                              |       | $                                               | 3,559      |                                          | $          | 941 |   | $ | 7,341 |   | $ | 1,443 |   |
|                                                                          |       |                                            |       |                                          |       |   |   |   |   |
| Cost of licensed  revenue (excluding intangibles amortization included below) |       | 1,127                                           |       | 1,473                                         |       | 2,357 |   | 2,173 |   |
| Intangibles  amortization                                                     |       | 1,010                                           |       | 1,010                                         |       | 2,020 |   | 1,467 |   |
|                                                                          |       |                                            |       |                                          |       |   |   |   |   |
| Total cost of licensed  revenue                                               |       | 2,137                                           |       | 2,483                                         |       | 4,377 |   | 3,640 |   |
|                                                                          |       |                                            |       |                                          |       |   |   |   |   |
| Licensed gross margin                                                         |       | $                                               | 1,422      |                                          | $          | (1,542 | ) | $ | 2,964 |   | $ | (2,197 | ) |
|                                                                          |       |                                            |       |                                          |       |   |   |   |   |
| Licensed gross margin percentage                                              |       | 40                                              | %          | (164                                          | )%         | 40 | % | (152 | )% |

 

***Licensed revenue***

|                                   | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                        | ** ** | **2006**                                        | ** ** | **Percent  Change**                           | ** ** | **2005** | ** ** | **2006** | ** ** | **Percent  Change** | ** ** | **2005** | ** ** |
| ** **                        | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Licensed revenue                  |       | $                                               | 3,559      |                                          | 278        | % | $ | 941 |   | $ | 7,341 |   | 409 | % | $ | 1,443 |   |
| As a percentage of total revenues |       | 15                                              | %          |                                          |       | 5 | % | 15 | % |   |   | 4 | % |
|                                   |            |                                                 |            |                                               |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Licensed revenueis comprised of license fees, installation, training and PCS service feesrelating to our FSM solution, acquired in connection with our acquisition ofVidus in February 2005. The increase in licensed revenue for the three monthsended June 30, 2006 compared to the three months ended June 30, 2005 is due toan increase in consulting services for existing customers. The increase inlicensed revenue for the six months ended June 30, 2006 compared to the sixmonths ended June 30, 2005 is due to the fact that the 2005 licensed revenueonly includes licensed revenue from the February 18, 2005 acquisition datethrough June 30, 2005 as well as an increase in consulting services forexisting customers. In addition, for the three and six months endedJune 30, 2005, there were unresolved contract commitments, whichresulted in $2.2 million of revenue being recorded for the three monthsended September 30, 2005, upon the successful resolution of thesecontract commitments thus allowing for recognition over the PCS term through2008. The number of licensed users of our FSM solution totaled approximately32,000 and 26,000 at June 30, 2006 and 2005, respectively.

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***Cost of licensed revenue (excluding intangiblesamortization)***

|                                                                | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                     | ** ** | **2006**                                        | ** ** | **Percent  Change**                           | ** ** | **2005** | ** ** | **2006** | ** ** | **Percent  Change** | ** ** | **2005** | ** ** |
| ** **                                                     | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cost of licensed  revenue (excluding intangibles amortization) |       | $                                               | 1,127      |                                          | (23        | )% | $ | 1,473 |   | $ | 2,357 |   | 8 | % | $ | 2,173 |   |
| As a percentage of licensed revenues                           |       | 32                                              | %          |                                          |       | 157 | % | 32 | % |   |   | 151 | % |
|                                                                |            |                                                 |            |                                               |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Cost of licensedrevenue (excluding intangibles amortization) consists of employee relatedexpenses in relation to installation services and the support of our ongoingPCS commitments. The decrease in cost of licensed revenue for the three monthsended June 30, 2006 compared to the three months ended June 30, 2005 is due todecreases in employee-related expenses of $293,000 and travel expenses of$136,000.

The increase incost of licensed revenue for the six months ended June 30, 2006 compared to thesix months ended June 30, 2005 is due to the fact that the 2005 cost oflicensed revenue only includes the cost of licensed revenue from the February18, 2005 acquisition date through June 30, 2005 as well as an increase inemployee related expenses of $124,000 partially offset by a decrease in travelexpenses of $110,000.

Cost of licensedrevenue headcount decreased to 30 at June 30, 2006 from 39 at June 30, 2005. Weexpect the cost of licensed revenue to increase over the next twelve months asheadcount increases and we continue to invest in fixed assets andinfrastructure to support this segment.

***Licensed gross margin***

|                                      | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                           | ** ** | **2006**                                        | ** ** | **Percent  Change**                           | ** ** | **2005** | ** ** | **2006** | ** ** | **Percent  Change** | ** ** | **2005** | ** ** |
| ** **                           | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Licensed gross margin                |       | $                                               | 1,422      |                                          | 192        | % | $ | (1,542 | ) | $ | 2,964 |   | 235 | % | $ | (2,197 | ) |
| As a percentage of licensed revenues |       | 40                                              | %          |                                          |       | (164 | )% | 40 | % |   |   | (152 | )% |
|                                      |            |                                                 |            |                                               |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Licensed grossmargin increased to 40% for the three and six months ended June 30, 2006. Theincrease in licensed gross margin is primarily the result of an increase inrevenues and a fixed cost base. Direct expenses generally increase at a rateproportional to the growth in our end users. Personnel costs and depreciationexpenses generally increase at a rate slower than the growth rate of our endusers. We expect our licensed gross margin to increase during the next twelvemonths.

***Intangibles amortization***

|                                   | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                        | ** ** | **2006**                                        | ** ** | **Percent  Change**                           | ** ** | **2005** | ** ** | **2006** | ** ** | **Percent  Change** | ** ** | **2005** | ** ** |
| ** **                        | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Intangibles  amortization         |       | $                                               | 1,010      |                                          | 0          | % | $ | 1,010 |   | $ | 2,020 |   | 38 | % | $ | 1,467 |   |
| As a percentage of total revenues |       | 4                                               | %          |                                          |       | 5 | % | 4 | % |   |   | 4 | % |
|                                   |            |                                                 |            |                                               |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

For the three andsix months ended June 30, 2006 and 2005, intangibles amortization related tothe intangible assets acquired in connection with the purchase of Vidus inFebruary 2005. These costs are being amortized over their estimated usefullives of three to ten years.

Amortization ofintangible assets is expected to be $4.0 million in 2006 and 2007, after whichit is expected to decrease as the intangible assets become fully amortized.

***In-process research and development***

|                                      | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                           | ** ** | **2006**                                        | ** ** | **Percent  Change**                           | ** ** | **2005** | ** ** | **2006** | ** ** | **Percent  Change** | ** ** | **2005** | ** ** |
| ** **                           | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| In-process research and  development |       | $                                               | —     |                                          | —     | % | $ | — |   | $ | — |   | (100 | )% | $ | 5,640 |   |
| As a percentage of total revenues    |       | 0                                               | %          |                                          |       | 0 | % | 0 | % |   |   | 14 | % |
|                                      |            |                                                 |            |                                               |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

29

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For the six monthsended June 30, 2005, in-process research and development consisted of researchprojects undertaken by Vidus prior to its acquisition by us that had notreached technological feasibility and had no alternative future use at the timeof the acquisition of Vidus. In order to achieve technological feasibility, weestimated the time required to complete the projects to cost approximately $5.7million. We estimated the fair value assigned to in-process research anddevelopment using the income approach, which discounts to present value thecash flows expected to be attributable to the technology once it reachestechnological feasibility using a discount rate of 40%. The stages ofcompletion were determined by estimating the costs and time incurred to daterelative to the costs and time expected to be incurred to develop the in-processtechnology into a commercially viable technology or product, while consideringthe relative difficulty of completing the various tasks and overcoming theobstacles necessary to attain technological feasibility. The weighted averagestage of completion for all projects, in the aggregate, was approximately 80%as of the acquisition date. Cash flows from sales of products incorporatingthose technologies commenced in 2005. In 2005, expenditures to complete theacquired in-process research and development approximated the originalestimates.

***Sales and marketing***

|                                   | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                        | ** ** | **2006**                                        | ** ** | **Percent  Change**                           | ** ** | **2005** | ** ** | **2006** | ** ** | **Percent  Change** | ** ** | **2005** | ** ** |
| ** **                        | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Sales and marketing               |       | $                                               | 5,506      |                                          | (6         | )% | $ | 5,832 |   | $ | 11,424 |   | 9 | % | $ | 10,479 |   |
| As a percentage of total revenues |       | 24                                              | %          |                                          |       | 28 | % | 24 | % |   |   | 26 | % |
|                                   |            |                                                 |            |                                               |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Sales andmarketing expenses consist of employee salaries, sales commissions, marketingand promotional expenses. For the three months ended June 30, 2006 compared tothe three months ended June 30, 2005, sales and marketing expenses decreasedprimarily as a result of decreases in consulting expenses of $287,000,marketing expenses of $172,000, employee-related expenses of $143,000, andtravel expenses of $129,000 partially offset by an increase in employee stockbased compensation expense as a result of the adoption of SFAS 123R of$312,000.

For the six monthsended June 30, 2006 compared to the six months ended June 30, 2005, sales andmarketing expenses increased primarily as a result of increases inemployee-related expenses of $788,000, employee stock based compensationexpense as a result of the adoption of SFAS 123R of $569,000 partially offsetby decreases in consulting expense of $364,000 and marketing expense of$193,000.

Sales andmarketing headcount decreased to 127 at June 30, 2006 from 137 at June 30,2005. We anticipate that sales and marketing expenses will increase in futureperiods as we expand our sales and marketing efforts including, but not limitedto, promotional expenses related to new solutions.

***Research and development***

|                                   | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                        | ** ** | **2006**                                        | ** ** | **Percent  Change**                           | ** ** | **2005** | ** ** | **2006** | ** ** | **Percent  Change** | ** ** | **2005** | ** ** |
| ** **                        | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Research and development          |       | $                                               | 4,210      |                                          | 9          | % | $ | 3,849 |   | $ | 7,879 |   | 23 | % | $ | 6,424 |   |
| As a percentage of total revenues |       | 18                                              | %          |                                          |       | 19 | % | 16 | % |   |   | 16 | % |
|                                   |            |                                                 |            |                                               |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Research anddevelopment expenses consist of employee salaries and expenses related todevelopment personnel and consultants, as well as expenses associated withsoftware and hardware development. For the three months ended June 30, 2006compared to the three months ended June 30, 2005, research and developmentexpenses increased primarily as a result of an increase in employee stock basedcompensation expense as a result of the adoption of SFAS 123R of $264,000.

For the six monthsended June 30, 2006 compared to the six months ended June 30, 2005, researchand development expenses increased primarily as a result of increases inemployee-related expenses of $781,000 and an increase in employee stock basedcompensation expense as a result of the adoption of SFAS 123R of $437,000.

30

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Research anddevelopment headcount decreased to 153 at June 30, 2006 from 159 at June 30,2005. We anticipate that research and development expenses will increase infuture periods as we develop and introduce new solutions and as a result ofincreases in employee-related expenses associated with those introductions.

***General and administrative***

|                                   | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                        | ** ** | **2006**                                        | ** ** | **Percent  Change**                           | ** ** | **2005** | ** ** | **2006** | ** ** | **Percent  Change** | ** ** | **2005** | ** ** |
| General and administrative        |       | $                                               | 5,028      |                                          | 28         | % | $ | 3,942 |   | $ | 9,970 |   | 19 | % | $ | 8,389 |   |
| As a percentage of total revenues |       | 22                                              | %          |                                          |       | 19 | % | 21 | % |   |   | 21 | % |
|                                   |            |                                                 |            |                                               |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

General andadministrative expenses consist of employee salaries and related expenses forexecutive and administrative costs, accounting and professional fees,recruiting costs and allowance for doubtful accounts. For the three monthsended June 30, 2006 compared to the three months ended June 30, 2005, generaland administrative expenses increased primarily as a result of increases in baddebt expense of $455,000, employee stock based compensation expense as a resultof the adoption of SFAS 123R of $435,000 accounting and professional fees of$214,000 and legal expenses of $147,000 partially offset by a decrease inemployee-related expenses of $285,000.

For the six monthsended June 30, 2006 compared to the six months ended June 30, 2005, general andadministrative expenses increased primarily as a result of increases inemployee stock based compensation expense as a result of the adoption of SFAS123R of $823,000, bad debt expense of $490,000 and accounting and professionalfees of $285,000 partially offset by a decrease in employee-related expenses of$208,000.

General andadministrative headcount decreased to 86 at June 30, 2006 from 90 at June 30,2005. We expect that general and administrative expenses will remain relativelyflat in future periods.

The allowance fordoubtful accounts was $571,000 and $780,000 as of June 30, 2006 and 2005,respectively.  We anticipate that theallowance for doubtful accounts will remain relatively stable in future periods.

***Stock-based compensation***

OnJanuary 1, 2006, we adopted SFAS 123R on a modified prospective basis, whichrequires the application of the accounting standard to all share-based awardsissued on or after January 1, 2006 and any outstanding share-based awards thatwere issued in prior years but not vested as of January 1, 2006, as adjustedfor estimated forfeitures. The following table indicates the impact of SFAS123R on our statement of operations for the three and six months ended June 30,2006.

|                                   | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                        | ** ** | **2006**                                        | ** ** | **Percent  Change**                           | ** ** | **2005** | ** ** | **2006** | ** ** | **Percent  Change** | ** ** | **2005** | ** ** |
| Stock-based  compensation:        |       |                                            |       |                                          |       |   |   |   |   |   |   |   |   |
| Cost of hosted  revenues          |       | $                                               | 137        |                                          | 100        | % | $ | — |   | $ | 222 |   | 100 | % | $ | — |   |
| Cost of licensed  revenues        |       | 46                                              |       | 100                                           | %          | — |   | 73 |   | 100 | % | — |   |
| Sales and  marketing              |       | 313                                             |       | 100                                           | %          | — |   | 569 |   | 100 | % | — |   |
| Research and  development         |       | 264                                             |       | 100                                           | %          | — |   | 437 |   | 100 | % | — |   |
| General and  administrative       |       | 435                                             |       | 100                                           | %          | — |   | 823 |   | 100 | % | — |   |
| Total stock-based  compensation   |       | $                                               | 1,195      |                                          |       |   | $ | — |   | $ | 2,124 |   |   |   | $ | — |   |
| As a percentage of total revenues |       | 5                                               | %          |                                          |       | 0 | % | 4 | % |   |   | 0 | % |

 

Stock-based compensation expense includes theamortization of the fair value of share-based payments made to employees andthe Board of Directors, primarily in the form of stock options and purchasesunder the employee stock purchase plan as we adopted the provisions of SFAS123R effective January 1, 2006. The fair value of the award is computed usingthe Black-Scholes model and is recognized as expense over the employee’srequisite service period (generally over the vesting period of the award).Prior to the adoption of SFAS 123R, we previously applied Accounting PrinciplesBoard Opinion No. 25, *Accounting for StockIssued to Employees* (“APB 25”), and provided the required pro formadisclosures of Statement of Financial Accounting Standards No. 123, *Share-Based Payment* (“SFAS 123”).

31

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Duringthe three and six months ended June 30, 2006, we recorded stock-basedcompensation related to stock options of $905,000 and $1.7 million,respectively, and related to the employee stock purchase plan of $290,000 and$420,000, respectively. During the three and six months ended June 30, 2006,there were 314,000 shares purchased under the employee stock purchase plan.

OnOctober 27, 2005, we accelerated the vesting of 811,110 stock options withexercise prices ranging from $6.40 to $14.58, being priced above the closingstock price on such date.  We recorded pro forma compensation expenserelated to this acceleration of $5.0 million for the three months endedDecember 31, 2005. The accelerated vesting of these stock options isexpected to reduce the compensation expense associated with these options infuture periods resulting from the adoption of SFAS 123R.

As ofJune 30, 2006, the unrecorded deferred stock-based compensation balance relatedto stock options was $5.0 million and will be recognized over an estimatedweighted average amortization period of 2.4 years. For the three and six monthsended June 30, 2006, stock-based compensation of $1,000 and $2,000,respectively, was capitalized as inventory. For the three months endingSeptember 30, 2006, we expect our stock compensation expense to increase whencompared with our results for the three months ended June 30, 2006 and March31, 2006 due to the grant of new options.

***Other income (expense), net***

|                                            | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                 | ** ** | **2006**                                        | ** ** | **Percent  Change**                           | ** ** | **2005** | ** ** | **2006** | ** ** | **Percent  Change** | ** ** | **2005** | ** ** |
| ** **                                 | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest income                            |       | $                                               | 1,077      |                                          | 48         | % | $ | 729 |   | $ | 2,113 |   | 57 | % | $ | 1,347 |   |
| Change in derivative  instrument liability |       | 135                                             |       | 104                                           | %          | (3,332 | ) | (1,016 | ) | 75 | % | (4,073 | ) |
| Other (expense) income,  net               |       | (5                                              | )          | 97                                            | %          | (154 | ) | (22 | ) | 86 | % | (152 | ) |
| Total other income  (expense), net         |       | $                                               | 1,207      |                                          | 144        | % | $ | (2,757 | ) | $ | 1,075 |   | 137 | % | $ | (2,878 | ) |
| As a percentage of total revenues          |       | 5                                               | %          |                                          |       | (13 | )% | 2 | % |   |   | (7 | )% |

 

For the three andsix months ended June 30, 2006, total other income (expense), net increased dueto a decrease in derivative instrument liability and further increased due tolarger invested balances and higher rates of return, when compared to the sameperiods in 2005. During the three and six months ended June 30, 2006, werecorded a benefit of $135,000 and an expense of $1.1 million, respectively, inrelation to the change in the fair value of the derivative instrument embeddedin the redeemable preferred stock issued as part of the Vidus acquisitioncompared to an expense of $3.3 million and $4.1 million for the three and sixmonths ended June 30, 2005, respectively. Other (expense) income, net consistedprimarily of immaterial net foreign currency exchange losses and gainsresulting from transactions with our wholly-owned subsidiaries in India and inthe United Kingdom. We conduct operations primarily within the United Stateswhere inflation during the three and six months ended June 30, 2006 and 2005has been low and has not materially impacted our operating results. Foreigncurrency exchange gains were expensed as incurred.

***Benefit from income taxes***

|                                   | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                        | ** ** | **2006**                                        | ** ** | **Percent  Change**                           | ** ** | **2005** | ** ** | **2006** | ** ** | **Percent  Change** | ** ** | **2005** | ** ** |
| Benefit from income  taxes        |       | $                                               | 322        |                                          | (90        | )% | $ | 3,195 |   | $ | 734 |   | (77 | )% | $ | 3,195 |   |
| As a percentage of total revenues |       | 1                                               | %          |                                          |       | 15 | % | 2 | % |   |   | 8 | % |
|                                   |            |                                                 |            |                                               |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

The benefit fromincome taxes for the three and six months ended June 30, 2006 was calculatedusing an annual projected effective yearly tax rate of approximately 11%. Forthe six months ended June 30, 2006, we recorded a benefit from income taxesprincipally due to current period losses in the United Kingdom. For the threeand six months ended June 30, 2005, we recorded a benefit for income taxesprincipally due to current and prior period losses in the United Kingdom.

We currentlybelieve that our fiscal 2006 effective tax rate will be a benefit of approximately11%. This effective tax rate differs from the statutory rate of 35% principallydue to the projected effects of non-deductible stock compensation of 12%,non-deductible changes in the value of the derivative embedded in the preferredstock issued in connection with the Vidus acquisition of 7%, and the tax ratedifferential on foreign losses of 6%. It is based on the projected mix offull-year income in each tax jurisdiction in which we operate and the relatedincome tax expense in each jurisdiction. Actual results could vary from thoseprojected. The tax expenses or benefits for significant unusual items or taxexposure items are treated as discrete items in the interim period in which theevents occur.

32

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***Preferred stock dividends***

|                                   | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                        | ** ** | **2006**                                        | ** ** | **Percent  Change**                           | ** ** | **2005** | ** ** | **2006** | ** ** | **Percent  Change** | ** ** | **2005** | ** ** |
| ** **                        | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Preferred stock  dividends        |       | $                                               | 126        |                                          | 2          | % | $ | 124 |   | $ | 250 |   | 38 | % | $ | 181 |   |
| As a percentage of total revenues |       | 1                                               | %          |                                          |       | 1 | % | 1 | % |   |   | 0 | % |
|                                   |            |                                                 |            |                                               |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Preferred stockdividends consist of dividends on redeemable preferred stock issued by us inconnection with the acquisition of Vidus. The holders of our preferred stockare entitled to receive dividends at the rate of $6.50 per share annually. Thedividends accrue day to day, whether or not earned or declared, from the dateof the acquisition. The dividends are payable when and if declared by the Boardof Directors or upon redemption of the preferred stock. Any accumulation ofunpaid dividends on the preferred stock does not bear interest.

**LIQUIDITYAND CAPITAL RESOURCES**

|                                                      | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                           | ** ** | **2006**                                      | ** ** | **Percent  Change** | ** ** | **2005** | ** ** |
| Net loss                                             |       | $                                             | (6,242     | ) | 57 | % | $ | (12,388 | ) |
| Non-cash charges                                     |       | 6,434                                         |       | (29 | )% | 9,273 |   |
| Change in working  capital assets and liabilities    |       | (12,031                                       | )          | (1,471 | )% | (766 | ) |
| Net cash used in  operating activities               |       | (11,839                                       | )          | (205 | )% | (3,881 | ) |
| Net cash provided by  investing activities           |       | (5,507                                        | )          | (117 | )% | 33,129 |   |
| Net cash provided by  financing activities           |       | 1,703                                         |       | 50 | % | 1,132 |   |
| Net (decrease) increase in cash and cash equivalents |       | $                                             | (15,643    | ) | 151 | % | $ | 30,380 |   |

 

As of June 30,2006, we had $10.1 million of cash and cash equivalents and $81.1 million ofshort-term investments. Working capital was $100.9 million.

For the six monthsended June 30, 2006, net cash used in operating activities increased $8.0million to $11.8 million compared to the same period in 2005 primarily due to$6.9 million used to reduce accounts payable and $2.3 million used in relationto increases in accounts receivable offset by reduced losses net of non-cashcharges of $2.8 million. The results in 2006 are primarily due to the negativeimpact of year-over-year changes in working capital assets and liabilitiesoffset by non-cash charges for depreciation and amortization, stock basedcompensation and a change in derivative instrument liability, partially offsetby deferred taxes. The results for the same period in 2005 are primarily due tonon-cash charges for in-process research and development, depreciation andamortization, a change in derivative instrument liability and the provision fordoubtful accounts and sales returns.

For the six monthsended June 30, 2006, the net cash provided by investing activities wascomprised of $38.2 million in proceeds from the sale of short-term investments,partially offset by $34.8 million used to purchase short-term investments and$2.1 million used to purchase property and equipment. For the six months endedJune 30, 2005, the net cash provided by investing activities was comprised of$94.2 million in proceeds from the sale of short-term investments, partiallyoffset by $54.2 million used to purchase short-term investments, $5.2 millionused for the acquisition of Vidus, net of cash acquired and $1.7 million usedto purchase property and equipment. Purchases of property and equipment relatedmainly to purchases of computer equipment and software to support our growth inoperations, infrastructure and headcount. We currently do not have any materialcommitments for capital expenditures, although we anticipate increases incapital expenditures and lease commitments with our expected growth inoperations and infrastructure over the next twelve months. We also mayestablish additional operations as we expand globally.

The net cash flowsprovided by financing activities for the six months ended June 30, 2006 and2005 were $1.7 million and $1.1 million, respectively, resulting fromproceeds from the exercise of stock options, the excess tax benefit on theexercise of employee stock options and purchases of common stock under ouremployee stock purchase plan.

33

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We believe thatexisting cash, cash equivalents and short-term investments, together with anycash generated from operations, will be sufficient to fund our operatingactivities, capital expenditures and other obligations for at least the nexttwelve months.

***Commitments and Contingencies***

Wehave certain fixed contractual obligations and commitments that include futureestimated payments. Changes in our business needs, cancellation provisions,changing interest rates, and other factors may result in actual paymentsdiffering from the estimates. We cannot provide certainty regarding the timingand amounts of all payments. We have presented below, a summary of the mostsignificant assumptions used in our determination of amounts presented in thetables in order to assist in the review of this information within the contextof our consolidated financial position, results of operations and cash flows.The following table summarizes our fixed contractual obligations as of June 30,2006 (in thousands):
| ** **                         | ** ** | **Total** | ** ** | **Less than  1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More than  5 Years** | ** ** |
|------------------------------------|------------|-----------|------------|---------------------------------|------------|--------------------|------------|--------------------|------------|----------------------------------|------------|
| Operating lease  obligations(1)    |       | $         | 8,207      |                            | $          | 2,029              |       | $                  | 5,259      |                             | $          | 919 |   | $ | — |   |
| Capital lease  obligations(2)      |       | 70        |       | 63                              |       | 7                  |       | —             |       | —                           |       |
| Other purchase  obligations(3)     |       | 4,717     |       | 4,717                           |       | —             |       | —             |       | —                           |       |
| Inventory purchase  obligations(4) |       | 8,977     |       | 8,977                           |       | —             |       | —             |       | —                           |       |
|                               |       | $         | 21,971     |                            | $          | 15,786             |       | $                  | 5,266      |                             | $          | 919 |   | $ | — |   |

 

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(1) Operating leasecommitments include minimum rental payments under our non-cancelable operatingleases for office facilities, as well as limited office equipment that weutilize under lease arrangements. The amounts presented are consistent withcontractual terms and are not expected to differ significantly unless asubstantial change in our headcount needs requires us to exit an officefacility early or expand our occupied space.

(2) Capital leaseobligations are included in the balance sheet under property, plant andequipment, net and primarily include minimum rental payments under ournon-cancelable leases for office equipment and furniture.

(3) Other purchaseobligation amounts include minimum purchase commitments for marketing, computerequipment, software applications, engineering development services and othergoods and services that were entered into in the ordinary course of business.Purchase obligations include agreements that are cancelable without penalty.Certain of these contractual arrangements contain significant performancerequirements. Given the significance of the performance requirements, actualpayments could differ significantly from these estimates.

(4) Inventory purchasecommitments include minimum payments under non-cancelable commitments for goodsthat were entered into in the ordinary course of business.

Excluded from the tableabove is the fair value of a derivative instrument for which the ultimatesettlement amount is not yet known and that is payable only upon redemption ofthe outstanding redeemable preferred stock to which it relates. See “Item 3—Quantitativeand Qualitative Disclosures About Market Risk” for further discussion.

**Off-BalanceSheet Arrangements**

As of June 30,2006, we had no off-balance sheet arrangements that have had, or are reasonablylikely to have, a current or future material effect on our consolidatedfinancial condition, results of operations, liquidity or capital resources.

**Impactof Recently Issued Accounting Pronouncements**

In November 2005,the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”)Nos. SFAS 115-1 and SFAS 124-1, *The Meaningof Other-Than-Temporary Impairment and Its Application to Certain Investments*.This FSP addresses the determination as to when an investment is consideredimpaired, whether that impairment is other than temporary and the measurementof an impairment loss. This FSP also includes accounting considerationssubsequent to the recognition of other-than-temporary impairments. The adoptionof the FSP did not have a material impact on our condensed consolidatedstatement of operations and financial condition.

34

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InDecember 2004, the Financial Accounting Standards Board (“FASB”) issuedSFAS No. 123 (revised 2004),*Share-Based Payment* (“SFAS 123R”), that addresses theaccounting for stock-based payment transactions in which an enterprise receivesemployee services in exchange for either equity instruments of the enterpriseor liabilities that are based on the fair value of the enterprise’s equityinstruments or that may be settled by the issuance of such equity instruments.The statement eliminates the ability to account for stock-based compensationtransactions using the intrinsic value method as prescribed by AccountingPrinciples Board (“APB”) Opinion No. 25,*Accounting for Stock Issued to Employees*(“APB 25”), and generallyrequires that such transactions be accounted for using a fair value basedmethod and recognized as expense in the condensed consolidated statement ofoperations. SFAS 123R also requires additional accounting for the taxbenefit on employee stock options and for stock issued under our employee stockpurchase plan. The adoption of SFAS 123R on January 1, 2006, had amaterial impact on our results of operations and financial position. See “Note 9– Stock Based Compensation” to the Condensed Consolidated Financial Statementsfor additional disclosure related to SFAS 123R.

On June 7,2005, the FASB issued SFAS No. 154, *AccountingChanges and Error Corrections, a replacement of APB Opinion No  20, AccountingChanges, and Statement No  3, Reporting Accounting Changes in InterimFinancial Statements*(“SFAS 154”). SFAS 154 changes therequirements for accounting and reporting a change in accounting principle.Previously, most voluntary changes in accounting principles were required to berecognized by way of a cumulative effect adjustment within net income duringthe period of the change. SFAS 154 requires retrospective application toprior periods’ financial statements, unless it is impracticable to determineeither the period-specific effects or the cumulative effect of the change.SFAS 154 is effective for accounting changes made in fiscal yearsbeginning after December 15, 2005; however, SFAS 154 does not changethe transition provisions of any existing accounting pronouncements.

In July 2005, the FASB issued InterpretationNo. 48 (“FIN 48”), *Accounting for Uncertaintyin Income Taxes*. This interpretation prescribes a comprehensivemodel for how a company should recognize, measure, present, and disclose in itsfinancial statements uncertain tax positions that the company has taken orexpects to take on a tax return. Under the Interpretation, the financialstatements will reflect expected future tax consequences of such positionspresuming the taxing authorities' full knowledge of the position and allrelevant facts, but without considering time values. We have not yet completedour evaluation of the impact that adoption of FIN 48 will have on ourcondensed consolidated statement of operations and financial condition.

**FACTORSTHAT COULD AFFECT FUTURE RESULTS**

In addition to the other information contained in thisQuarterly Report on Form 10-Q, the following factors should be carefullyconsidered in evaluating our business and prospects. The risks anduncertainties described below are intended to be ones that are specific to usor our industry and that we deem material, but they are not the only ones thatwe face.

**On February 18, 2005, weacquired Vidus. The combined company may not realize expected benefits becauseof integration and other challenges.**

If the combined company fails to meet the challengesinvolved in integrating operations and products successfully or otherwise failsto realize any of the anticipated benefits of the acquisition, then the resultsof operations of the combined company could be seriously harmed. Realizing thebenefits of the acquisition, if any, will depend in part on the successfulintegration of technology, operations and personnel. The integration of thecompanies is a complex, time-consuming and expensive process that couldsignificantly disrupt the business of the combined company.

The combined company may not successfully integratethe operations of @Road and Vidus in a timely manner, or at all, and thecombined company may not realize the anticipated benefits of the acquisition tothe extent, or in the timeframe, anticipated. The anticipated benefits of theacquisition are based on projections and assumptions, including successfulintegration, not actual experience. In addition to the integration risksdiscussed above, the combined company’s ability to realize those benefits couldbe adversely affected by practical or legal constraints on its ability tocombine operations.

**If the value of Vidus’ goodwill andor intangibles becomes impaired, we may be required to incur significant coststhat would adversely affect our financial results.**

Under the purchase method of accounting, the combinedcompany allocated the total estimated purchase price of $46.3 million to Vidus’tangible assets, purchased technology and other intangible assets andliabilities assumed based on their fair values as of the date of completion ofthe acquisition, and recorded the excess of the purchase price over those fairvalues as goodwill. The combined company will incur amortization expense overthe useful lives of amortizable intangible assets acquired in connection withthe acquisition. In addition, to the extent the value of goodwill and or intangiblesbecomes impaired, the combined company may be required to incur materialcharges relating to the impairment of these assets. Any potential impairmentcharge could have a material impact on the combined company’s results ofoperations and could have a material adverse effect on the market value of ourcommon stock.

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**If wireless communications providerson which we depend for services decide to adopt new wireless technologies, orabandon or do not continue to expand their wireless networks, our operationsmay be disrupted, we may lose customers and our revenues could decrease.**

Currently, oursolutions function on general packet radio service (“GPRS”), code divisionmultiple access (“CDMA”) 1XRTT, evolution-data optimized (“EvDO”), integrateddigital enhanced network (“iDEN”) and enhanced data rates for GSM evolution (“EDGE”)networks. These protocols cover only portions of the United States, Europe andCanada. In the first quarter of 2006, we completed a costly and time consumingmigration from CDPD to the protocols set forth above after wirelesscommunications providers abandoned their CDPD networks in favor of newertechnologies. If wireless communications providers abandon the protocols uponwhich our solutions now function in favor of other types of wirelesstechnology, we may not be able to provide services to our customers, or we maybe forced to incur considerable costs in order to adapt our solutions to newprotocols. In addition, if cellular carriers do not expand their coverageareas, we will be unable to meet the needs of customers who may wish to use ourservices outside the current cellular coverage area.

**Any material weakness or significantdeficiency identified in our internal controls could have an adverse effect onour business.**

Section 404 of the Sarbanes-Oxley Act of 2002requires that companies evaluate and report on their internal control structureand procedures for financial reporting. As part of our first quarter 2005 andfourth quarter 2005 closing processes and assessments of internal control overour financial reporting, we identified two internal control deficiencies thatconstituted material weaknesses. The first material weakness concerned ourinterpretation and implementation of various complex accounting principles inthe area of non-recurring transactions, and the second concerned ourcalculation and timely review of the annual tax provision for 2005. Thesematerial weaknesses were not fully remediated as of June 30, 2006. Please seeItem 4 “Controls and Procedures” in this Quarterly Report on Form 10-Q and inour Quarterly Report on Form 10-Q/A for the three months ended March 31, 2005,and Item 9A “Controls and Procedures” in Part II of our Annual Report on Form10-K/A for the year ended December 31, 2005 for additional information. Therecan be no assurance that there will not be other significant deficiencies ormaterial weaknesses that would be required to be reported in the future. Inaddition, we expect the evaluation process and any required remediation, ifapplicable, will increase our accounting, legal and other costs, and may divertmanagement resources from other business objectives and concerns.

**Our stock price is volatile, whichmay cause you to lose money and could lead to costly litigation against us thatcould divert our resources.**

From time to time, stock markets experience dramaticprice and volume fluctuations, particularly for shares of technology companies.These fluctuations can be unrelated to the operating performance of thesecompanies. Broad market fluctuations may reduce the market price of our commonstock and cause you to lose some or all of your investment. These fluctuationsmay be exaggerated if the trading volume of our common stock is low. Inaddition, due to the technology-intensive nature and growth rate of ourbusiness and the MRM market, the market price of our common stock may rise andfall in response to:

·                  quarterly variations in operatingresults;

·                  failure to achieve operating resultsanticipated by securities analysts and investors;

·                  changes in estimates of our financialperformance or changes in recommendations by securities analysts;

·                  announcements of technological orcompetitive developments;

·                  the gain or loss of a significantcustomer or order;

·                  disposition of shares of our commonstock held by large investors; and

·                  acquisitions or strategic alliancesby us or our competitors.

When the market price of a company’s stock dropssignificantly, stockholders often institute securities class action lawsuitsagainst that company. A lawsuit against us could cause us to incur substantialcosts and could divert the time and attention of our management and otherresources from our business.

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**We face competition from internaldevelopment teams of potential customers and from existing and potentialcompetitors, and if we fail to compete effectively, our ability to acquire newcustomers could decrease, our revenues would decline and our business wouldsuffer.**

The market for MRM solutions is competitive and isexpected to become even more competitive in the future. If we do not competeeffectively, competition could harm our business and limit our ability toacquire new customers and grow revenues, which in turn could result in a lossof our market share and decline in revenues. We believe that our solutions facecompetition from a number of business productivity solutions, including:

·                  solutionsdeveloped internally by our prospective customers’ information technologystaff, particularly by large customer prospects;

·                  discrete meansof communication with mobile workers, such as pagers, two-way radios, handhelddevices and cellular telephones;

·                  solutionstargeted at specific vertical markets, such as a service offered by Qualcommthat monitors assets in the long-haul transportation sector;

·                  solutionsdesigned to help companies schedule and route their mobile workers; and

·                  solutions offered by smaller marketentrants, many of which are privately held and operate on a regional basis.

In addition, we believe that our solutions facecompetition from manufacturing companies that seek to enter the mobile resourcemanagement market, such as Trimble Navigation.

We may also face competition from our current andpotential alliances, such as wireless carriers, that may develop their ownsolutions, develop solutions with captive and other suppliers or support themarketing of solutions of other competitors.

We also face numerous challenges associated withovercoming the following competitive factors:

·                  *Sizeand resources.  *Many of our current and potential competitorshave access to substantially greater financial, marketing, distribution,engineering and manufacturing resources than we do, which may enable them toreact more effectively to new market opportunities and customer requirements.Furthermore, these competitors may be able to adopt more aggressive pricingpolicies and offer more attractive terms than we can.

·                  *Namerecognition.  *Many of our current and potentialcompetitors have greater name recognition and market presence than we do, whichmay allow them to more effectively market and sell solutions to our current andpotential customers.

·                  *Limitsof product and service offerings.  *Although we offer abroad range of mobile resource management solutions, a customer prospect mayrequire functionality that we do not offer, which may enable current andpotential competitors to exploit the areas in which we do not developsolutions.

·                  *Customerrelationships.  *Many of our current and potentialcompetitors have pre-existing relationships with our large customer prospects,which may allow them to more effectively market and sell competitive MRMsolutions.

**As we seek to serve larger customers,we face competition from businesses with greater financial resources, and wemay be unable to compete effectively with these businesses.**

The existing market is competitive. Competition isparticularly vigorous for larger customers, which is a customer segment we haveworked to serve. We expect competition to increase further as companies developnew products and/or modify their existing products to compete directly withours. In addition, competitors may reduce prices to customers and seek toobtain our customers through cost-cutting and other measures. To the extentthese companies compete effectively with us, our business could be adverselyaffected by extended sales cycles, fewer sales, and lower prices, revenue andmargins.

**Under the terms of our customercontracts for our hosted solutions, once the contract period expires, acustomer may terminate our services with little or no notice.**

Our customer contracts for our hosted solutionstypically provide for a contract period of one, two or three years. Under theterms of a typical contract, a customer will often be subject to a terminationfee if it chooses to terminate the contract before the contract period expires.Once the contract period has expired, and unless a customer has executed a newcontract, the terms of the contract will remain in force on a month-to-monthbasis, allowing the customer to terminate the contract by giving very shortnotice and without incurring any termination fee. The termination of asignificant number of customer contracts or customer contracts providing amaterial portion of our revenues, could cause our business to suffer andadversely affect our financial results.

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**Our business is subject to the risksassociated with international operations.**

We recently began offering our products and servicesin the United Kingdom and Europe, and we have operations in India. Asignificant portion of our revenue is derived from our internationaloperations. We have limited experience operating in these foreignjurisdictions. As a result, our operating results and financial condition couldbe significantly affected by risks associated with international activities,including economic and labor conditions, political instability, tax laws(including United States taxes on foreign subsidiaries), the enactment of newlaws affecting our activities, government regulation of our activities, andchanges in the value of the United States dollar relative to the local currencyin which our products are sold and our goods and services are purchased.

**Our quarterly operating results aresubject to fluctuations, and our stock price may decline if we do not meet theexpectations of investors and analysts.**

Our quarterly revenues and operating results aredifficult to predict and may fluctuate significantly from quarter to quarterdue to a number of factors, many of which are outside our control. Thesefactors include, but are not limited to:

·                  changes in the market for MRMsolutions;

·                  delays in market acceptance orimplementation of our solutions by customers;

·                  changes in length of sales cycles of,or demand by, our customers for existing and additional solutions;

·                  changes in the productivity of ourdistribution channels;

·                  introduction of new solutions by usor our competitors;

·                  changes in our pricing policies orthose of our competitors or suppliers;

·                  changes in our mix of sources ofrevenues;

·                  general economic and politicalconditions;

·                  wireless networks, positioningsystems and Internet infrastructure owned and controlled by others; and

·                  any need to migrate to new wirelessnetworks, which could cause our solutions to be incompatible with new wirelessnetworks or become out of date.

Our expense levels are based, in part, on ourexpectation of future revenues. Additionally, a substantial portion of ourexpenses is relatively fixed. As a result, any shortfall in revenues relativeto our expectations could cause significant changes in our operating resultsfrom quarter to quarter. We believe period-to-period comparisons of our revenuelevels and operating results are not meaningful. You should not rely on ourquarterly revenues and operating results to predict our future performance. Ouroperating results have been, and in some future quarters our operating resultsmay be, below the expectations of public market analysts and investors and, asa result, the price of our common stock may fall.

**Our success depends upon our abilityto develop new solutions and enhance our existing solutions. If we cannotdeliver the features and functionality our customers demand, we will be unableto retain or attract new customers.**

If we are unable to develop new solutions, are unableto enhance and improve our solutions successfully in a timely manner, or failto position and/or price our solutions to meet market demand, we may notattract new customers, existing customers may not expand their use of oursolutions, and our business and operating results will be adversely affected.If our enhancements to existing solutions do not deliver the functionality thatour customer base demands, our customers may choose not to renew theiragreements with us when they reach the end of their initial contract periods,and our business and operating results will be adversely affected. If we cannoteffectively deploy, maintain and enhance our solutions, our revenues maydecrease, we may not be able to recover our costs, and our competitive positionmay be harmed.

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**If one or more of the agreements wehave with wireless communications providers is terminated and as a result, weare unable to offer our solutions to customers within a wireless communicationsprovider’s coverage area, we may be unable to deliver our solutions, we maylose customers, and our revenues could decrease.**

Our existing agreements with wireless communicationsproviders may, in some cases be terminated immediately upon the occurrence ofcertain conditions or with prior written notice. If one or more of our wirelesscommunications providers decides to terminate or not to renew its contract withus, we may incur additional costs relating to obtaining alternate coverage fromanother wireless communications provider outside of its primary coverage area,or we may be unable to replace the coverage at all, causing a complete loss ofservices to our customers in that coverage area.

**We have a history of losses and maynot achieve or increase profitability in the future.**

We have a history of losses and may not achieve orincrease profitability in the future. As of June 30, 2006, we had anaccumulated deficit of approximately $85.3 million. To achieve profitability,we will need to generate significant revenues to offset our cost of revenuesand our sales and marketing, research and development and general andadministrative expenses. We may not achieve or sustain our revenue or profitgoals and may incur losses in the future. Changes such as increases in ourpricing for solutions or the pricing of competing solutions may harm ourability to increase sales of our solutions to new and existing customers. If weare not able to expand our customer base and increase our revenue from new andexisting customers, we may continue to be unprofitable.

**We may establish alliances or acquiretechnologies or companies in the future, which could result in the dilution ofour stockholders and disruption of our business, which could reduce ourrevenues or increase our costs.**

We are continually evaluating business alliances andexternal investments in technologies related to our business. Acquisitions ofcompanies, divisions of companies, businesses or products and strategic alliancesentail numerous risks, any of which could materially harm our business inseveral ways, including:

·                  diversion of management’s attentionfrom our core business objectives and other business concerns;

·                  failure to integrate efficientlybusinesses or technologies acquired in the future with our pre-existingbusiness or technologies;

·                  potential loss of key employees fromeither our pre-existing business or the acquired business;

·                  dilution of our existing stockholdersas a result of issuing equity securities; and

·                  assumption of liabilities of theacquired company.

Some or all of these problems may result from currentor future alliances, acquisitions or investments. Furthermore, we may notrealize any value from these alliances, acquisitions or investments.

**We depend on a limited number ofthird parties to manufacture and supply certain components of our solutions.**

We rely on a limited number of sole suppliers forcertain components of our solutions. We do not have long-term agreements withthese suppliers. If these parties do not perform their obligations, or if theycease to supply the components needed for our solutions, we may be unable tofind other suppliers and our business would be seriously harmed. We cannot besure that alternative sources for these components will be available whenneeded, or if available, that these components will be available oncommercially reasonable terms. These sole suppliers include Motorola, whichsupplies microcontrollers for use in our Internet Location Manager, Micronet,which supplies our *i*DT devices,and Everex, which supplies our *i*LM-W device.

It is our practice to attempt to maintain no more thana three to nine month supply of microcontrollers, *i*DT devices and other components and devices needed for oursolutions. Although we believe that we have sufficient quantities of suchcomponents and devices to last the next three to nine months, if any of ourarrangements with our suppliers and manufacturers are terminated, if we areunable to obtain sufficient quantities of any products or components criticalfor our solutions, if the quality of these products or components isinadequate, or if the terms for supply of these products or components becomecommercially unreasonable, our search for additional or alternate suppliers andmanufacturers could result in significant delays, added expense and ourinability to maintain or expand our customer base. Any of these events couldrequire us to take unforeseen actions or devote additional resources to provideour products and services and could harm our ability to compete effectively.

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**A disruption of our services or ofour software applications due to accidental or intentional security breachesmay harm our reputation, cause a loss of revenues and increase our expenses.**

Unauthorized access, computer viruses and otheraccidental or intentional actions could disrupt our information systems orcommunications networks or could adversely impact the functionality andsecurity of our software products. We expect to incur significant costs toprotect against the threat of security breaches and to alleviate problemscaused by any breaches. Currently, the wireless transmission of our customers’proprietary information is not protected by encryption technology. If a thirdparty were to misappropriate our customers’ proprietary information oradversely impact the operations of our customers, we could be subject toclaims, litigation or other potential liabilities that could seriously harm ourrevenues and result in the loss of customers.

**System or network failures couldreduce our sales, increase costs or result in liability claims.**

Any disruption to our services, information systems orcommunications networks or those of third parties could result in the inabilityof our customers to receive our services for an indeterminate period of time.Our hosted solutions and related operations depend upon our ability to maintainand protect our computer systems at data centers located in Ashburn, Virginiaand Redwood City, California, and our network operations center in Fremont,California. The facilities in California are in or near earthquake fault zones.Our services may not function properly and we may not be able to adequatelysupport and maintain our software products if our systems fail, if there is aninterruption in the supply of power, or if there is an earthquake, fire, floodor other natural disaster, or an act of war or terrorism. Within each of ourdata centers, we have fully redundant systems; however, in the event of asystem or network failure, the process of shifting access to customer data fromone data center to the other would be performed manually, and could result in afurther disruption to our services and our ability to adequately support andmaintain our software products. Any disruption to our services could cause usto lose customers or revenue, or face litigation, customer service or repairwork that would involve substantial costs and could distract management fromoperating our business.

**Our success and ability to competedepend upon our ability to secure and protect patents, trademarks and otherproprietary rights.**

Our success and ability to compete depend on ourability to protect our proprietary rights to the technologies used to implementand operate our solutions in the United States, the United Kingdom and in othercountries. In the event that a third party breaches the confidentialityprovisions or other obligations in one or more of our agreements ormisappropriates or infringes our intellectual property rights or theintellectual property rights licensed to us by third parties, our businesscould be seriously harmed. To protect our proprietary rights, we rely on acombination of trade secrets, confidentiality and other contractual provisionsand agreements, and patent, copyright and trademark laws, which afford us onlylimited protection. Third parties may independently discover or inventcompeting technologies or reverse engineer our trade secrets, software or othertechnology. Furthermore, laws in some foreign countries may not protect ourproprietary rights to the same extent as the laws of the United States.Therefore, the measures we take to protect our proprietary rights may not beadequate.

**Claims that we infringe third-partyproprietary rights could result in significant expenses or restrictions on ourability to provide our solutions.**

Third parties may claim that our current or futuresolutions infringe their proprietary rights or assert other claims against us.As the number of entrants into our market increases, the possibility of anintellectual property or other claim against us grows. Any intellectualproperty or other claim, with or without merit, would be time-consuming andexpensive to litigate or settle and could divert management’s attention from ourcore business. As a result of such a dispute, we may have to pay damages, incursubstantial legal fees, develop costly non-infringing technology, if possible,or enter into license agreements, which may not be available on termsacceptable to us, if at all. Any of these results would increase our expensesand could decrease the functionality of our solutions, which would make oursolutions less attractive to our current or potential customers. We have agreedin some of our agreements, and may agree in the future, to indemnify otherparties for any expenses or liabilities resulting from claimed infringements ofthe proprietary rights of third parties.

**If our customers do not have accessto sufficient capacity on reliable wireless networks, we may be unable todeliver our services, our customers’ satisfaction could decline and ourrevenues could decrease.**

Part of our ability to grow and maintainprofitability depends on the ability of wireless carriers to provide sufficientnetwork capacity, reliability and security to our customers. Even wherewireless carriers provide coverage to entire metropolitan areas, there areoccasional lapses in coverage, for example due to tunnels blocking thetransmission of data to and from wireless modems used with our solutions. Theseeffects could make our services less reliable and less useful, and customersatisfaction could suffer.

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**We depend on GPS technology owned andcontrolled by others. If we do not have continued access to GPS technology orsatellites, we will be unable to deliver a majority of our solutions andrevenues will decrease.**

A majority of our solutions rely on signals fromglobal positioning system (“GPS”) satellites built and maintained by the UnitedStates Department of Defense. GPS satellites and their ground support systemsare subject to electronic and mechanical failures and sabotage. If one or moresatellites malfunction, there could be a substantial delay before they arerepaired or replaced, if at all, our products and services may cease tofunction, and customer satisfaction would suffer.

In addition, the United States government could decideto discontinue operation and maintenance of GPS satellites or to charge for theuse of GPS. Furthermore, because of ever-increasing commercial applications ofGPS and international political unrest, United States government agencies maybecome increasingly involved in the administration or the regulation of the useof GPS signals in the future. If factors such as the foregoing affect GPS, forexample by affecting the availability, quality, accuracy or pricing of GPStechnology, our business will suffer.

**Defects or errors in our solutionscould result in the cancellation of or delays in the implementation of oursolutions, which would damage our reputation and harm our financial condition.**

We must develop our solutions quickly to keep pacewith the rapidly changing MRM market. Solutions that address this market arelikely to contain undetected errors or defects, especially when firstintroduced or when new versions are introduced. We may be forced to delaycommercial releases of new solutions or updated versions of existing solutionsuntil such errors or defects are corrected, and in some cases, we may need toimplement enhancements to correct errors that were not detected until afterdeployment of our solutions. Even after testing and release, our solutions maynot be free from errors or defects, which could result in the cancellation ordisruption of our services or dissatisfaction of customers. In some cases, customersmay terminate their agreements with us without penalty if the solution we haveprovided does not meet the specifications agreed upon by the parties. Suchcontract terminations or customer dissatisfaction would damage our reputationand result in lost revenues, diverted development resources, and increasedsupport and warranty costs.

**The production or reporting ofinaccurate information could cause the loss of customers and expose us to legalliability.**

The accurate production and reporting of informationis critical to our customers’ businesses. If we fail to accurately produce andreport information, we could lose customers, our reputation and ability toattract new customers could be harmed, and we could be exposed to legalliability. We may not have insurance adequate to cover losses we may incur as aresult of these inaccuracies.

**Our success depends on our ability tomaintain and expand our sales channels.**

To increase our market awareness, customer base andrevenues, we need to expand our direct and indirect sales operations. There isstrong competition for qualified sales personnel, and we may not be able toattract or retain sufficient new sales personnel to expand our operations. Newsales personnel require training, and it takes time for them to achieve fullproductivity, if at all. In addition, we believe that our success is dependenton the expansion of our indirect distribution channels, including ourrelationships with wireless carriers, independent sales agents and resellers.These sales channel alliances require training in selling our solutions and itwill take time for these alliances to achieve productivity, if at all. We maynot be able to establish relationships with additional distributors on a timelybasis, or at all. Our independent sales agents and resellers, many of which arenot engaged with us on an exclusive basis, may not devote adequate resources topromoting and selling our solutions.

**We depend on recruiting and retainingqualified personnel, and our inability to do so may result in a loss in sales,impair our ability to effectively manage our operations or impair our abilityto develop and support our solutions.**

Because of the technical nature of our solutions andthe market in which we compete, our success depends on the continued servicesof our current executive officers and our ability to attract and retainqualified personnel with expertise in wireless communications, GPStechnologies, hosted software applications, transaction processing and theInternet. Competitors and others have recruited our employees in the past andmay attempt to do so in the future. In addition, new employees generallyrequire substantial training, which requires significant resources andmanagement attention. Even if we invest significant resources to recruit, trainand retain qualified personnel, there can be no assurances that we will besuccessful in our efforts.

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**From time to time, we are or may besubject to litigation that could result in significant costs to us.**

From time to time, we are or may be subject tolitigation in the ordinary course of business relating to any number or type ofclaims, including claims for damages related to errors and malfunctions of ourproducts and services or their deployment. A securities, product liability,breach of contract, or other claim could seriously harm our business because ofthe costs of defending the lawsuit, diversion of employees’ time and attention,and potential damage to our reputation. Some of our agreements with customers,suppliers and other third parties contain provisions designed to limit exposureto potential claims. Limitation of liability provisions contained in ouragreements may not be enforceable under the laws of some jurisdictions. As aresult, we could be required to pay substantial amounts of damages insettlement or upon the determination of any of these types of claims. Althoughwe carry general liability and directors and officers insurance, our insurancemay not cover potential claims or may not be adequate to cover all costsincurred in defense of potential claims or to indemnify us for all liabilitiesthat may be imposed.

**Government regulations and standardscould subject us to increased regulation, increase our costs of operations orreduce our opportunities to earn revenue.**

In addition to regulations applicable to businesses ingeneral, we may also be subject to direct regulation by United Statesgovernmental agencies, including the Federal Communications Commission,Department of Defense, Department of Commerce or the State Department. Theseregulations may impose licensing requirements, privacy safeguards relating tocertain subscriber information, or safety standards, for example with respectto human exposure to electromagnetic radiation and signal leakage. A number oflegislative and regulatory proposals under consideration by federal, state,provincial, local and foreign governmental organizations may lead to laws orregulations concerning various aspects of the Internet, wireless communicationsand GPS technology, including on-line content, user privacy, taxation, accesscharges and liability for third-party activities. Additionally, it is uncertainhow existing laws governing issues such as taxation on the use of wirelessnetworks, intellectual property, libel, user privacy and property ownershipwill be applied to our solutions. The adoption of new laws or the applicationof existing laws may expose us to significant liabilities and additionaloperational requirements, which could decrease the demand for our solutions andincrease our cost of doing business. Wireless communications providers whosupply us with airtime are subject to regulation by the Federal CommunicationsCommission, and regulations that affect them could also increase our costs orlimit our ability to provide our solutions.

**Fluctuations in the value of foreigncurrencies could result in decreased revenues, increased product costs andoperating expenses.**

We have customers, suppliers and manufacturers thatare located outside the United States. Some transactions relating to supply anddevelopment agreements may be conducted in currencies other than the UnitedStates dollar, and fluctuations in the value of foreign currencies relative tothe United States dollar could cause us to incur currency exchange costs. Inaddition, some of our transactions denominated in United States dollars may besubject to currency exchange rate risk. We cannot predict the effect ofexchange rate fluctuations on our future operating results. Should there be asustained increase in average exchange rates for the local currencies in thesecountries, our suppliers and manufacturers may request a price increase at theend of the contract period.

**Geopolitical, economic and militaryconditions, including terrorist attacks and other acts of war, may materiallyand adversely affect the markets on which our common stock trades, the marketsin which we operate, our operations and our profitability.**

Terrorist attacks and other acts of war, and anyresponse to them, may lead to armed hostilities and such developments wouldlikely cause instability in financial markets. Armed hostilities and terrorismmay directly impact our facilities, personnel and operations which are locatedin the United States, the United Kingdom and India, as well as those of ourcustomers and suppliers. Furthermore, severe terrorist attacks or acts of warmay result in temporary halts of commercial activity in the affected regions,and may result in reduced demand for our solutions. These developments couldhave a material adverse effect on our business and the trading price of ourcommon stock.

**As of June 30, 2006, a limited numberof stockholders own approximately 33% of our stock and may act, or preventcertain types of corporate actions, to the detriment of other stockholders.**

Ourdirectors, officers and greater than 5% stockholders own, as of June 30, 2006,approximately 33% of our outstanding common stock. Accordingly, thesestockholders may, if they act together, exercise significant influence over allmatters requiring stockholder approval, including the election of a majority ofthe directors and the determination of significant corporate actions. Thisconcentration could also have the effect of delaying or preventing a change incontrol that could otherwise be beneficial to our stockholders.

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**Our certificate of incorporation andbylaws and state law contain provisions that could discourage a takeover.**

We have adopted a certificate of incorporation andbylaws, which in addition to state law, may discourage, delay or prevent amerger or acquisition that a stockholder may consider favorable. Theseprovisions include the following:

·                  establishing aclassified board in which only a portion of the total board members will beelected at each annual meeting;

·                  authorizing theboard to issue preferred stock;

·                  prohibitingcumulative voting in the election of directors;

·                  limiting thepersons who may call special meetings of stockholders;

·                  prohibitingstockholder action by written consent; and

·                  establishingadvance notice requirements for nominations for election to the board ofdirectors or for proposing matters that can be acted on by stockholders atstockholder meetings.

We have adopted a certificate of incorporation thatpermits our board to issue shares of preferred stock without stockholderapproval, which means that our board could issue shares with special votingrights or other provisions that could deter a takeover. In addition to delayingor preventing an acquisition, the issuance of a substantial number of shares ofpreferred stock could adversely affect the price of our common stock and diluteexisting stockholders.

**Item 3. Quantitative and Qualitative Disclosures AboutMarket Risk.**

**Interestrate risk**

We areexposed to the impact of interest rate changes and changes in the market valuesof our marketable securities. We have not used derivative financial instrumentsin our investment portfolio. We invest our excess cash in debt instruments ofhigh-quality corporate issuers and the United States government or itsagencies. Our investment policy limits the amount of credit exposure to any oneissuer and limits our investments to maturity dates of less than one year. Weare averse to principal loss and seek to preserve our invested funds bylimiting default risk, market risk and reinvestment risk. We mitigate defaultrisk by investing in high credit quality securities and by positioning our portfolioto respond appropriately to a significant reduction in a credit rating of anyinvestment issuer or guarantor. The portfolio includes only marketablesecurities with active secondary or resale markets to provide portfolioliquidity.

Cash,cash equivalents and marketable securities in both fixed and floating rateinterest-earning instruments carry a degree of interest rate risk. Fixed ratesecurities may have their fair market value adversely impacted due to risinginterest rates, while floating rate securities may produce less income thanexpected if interest rates fall. Due in part to these factors, our futureinterest income may fall short of expectations due to changes in interest ratesor we may suffer losses if forced to sell securities that have declined inmarket value due to changes in interest rates.

Thetable below presents the carrying value and related weighted average rate ofreturn for our cash, cash equivalents and debt securities. The carrying valuesapproximate fair values as of June 30, 2006 and December 31, 2005. As of June30, 2006, debt securities consisted of $10.1 million with original maturitydates of 90 days or less and $81.1 million with original maturity dates ofgreater than 90 days. As of December 31, 2005, debt securities consisted of$25.8 million with original maturity dates of 90 days or less and $77.6 millionwith original maturity dates of greater than 90 days.
| ** **                                              | ** ** | **Carrying  value at  June 30,  2006** | ** ** | **Average  rate of  return at  June 30,  2006** | ** ** | **Carrying  value at  December 31,  2005** | ** ** | **Average  rate of  return at  December 31,  2005** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                              | ** ** | **(in thousands)**                          | ** ** | **(annualized)**                                               | ** ** | **(in thousands)**                              | ** ** | **(annualized)**                                                   | ** ** |
| **Cash,  cash equivalents and marketable securities**   | ** ** | ** **                                       | ** ** | ** **                                                     | ** ** | ** **                                           | ** ** | ** **                                                         | ** ** |
| Cash and cash  equivalents—variable rate           |       | $                                                | 4,565      |                                                           | 4.5        | %                                                    | $          | 8,984                                                              |       | 2.8 | % |
| Money market  funds—variable rate                  |       | 3,359                                            |       | 5.1                                                            | %          | 7,030                                                |       | 3.6                                                                | %          |
| Cash and cash  equivalents—fixed rate              |       | 2,206                                            |       | 5.1                                                            | %          | 9,759                                                |       | 4.2                                                                | %          |
|                                                    |       |                                             |       |                                                           |       |                                                 |       |                                                               |       |
| Total cash and  cash equivalents                        |       | 10,130                                           |       | 4.8                                                            | %          | 25,773                                               |       | 3.6                                                                | %          |
| Marketable  securities—fixed rate                  |       | 81,064                                           |       | 5.0                                                            | %          | 77,643                                               |       | 4.1                                                                | %          |
|                                                    |       |                                             |       |                                                           |       |                                                 |       |                                                               |       |
| Total cash, cash  equivalents and marketable securities |       | $                                                | 91,194     |                                                           | 4.9        | %                                                    | $          | 103,416                                                            |       | 4.0 | % |

 

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** **

**ForeignCurrency Exchange**

Wetransact business primarily in United States dollars. We are subject, however,to adverse movements in foreign currency exchange rates in those countrieswhere we conduct business. To date, the effect of fluctuations in foreigncurrency exchange rates on expenses has not been material. Operating expensesincurred by our subsidiary in India are denominated in Indian rupees. This subsidiarywas formed in November 1999 primarily to perform research and development andcustomer support services. Operating expenses incurred by our subsidiary in theUnited Kingdom are denominated in British pounds and euros. This subsidiary wasacquired as part of the Vidus acquisition and performs research anddevelopment, sales and marketing, and customer service activities. Operatingexpenses incurred in British pounds and Indian rupees exceed revenues generatedin these currencies, which we do not hedge. A ten percent increase in theaverage exchange rates of these currencies would decrease our operating incomeby approximately 5.3%.

Wehold fixed-price agreements denominated in United States dollars with certainof our foreign-based suppliers: Orient Semiconductor Electronics, in Taiwan,which manufactures the Internet Location Manager; Siemens AG, in Germany, whichprovides the modem for some versions of the *i*LM;Taiwan Semiconductor Manufacturing Company, in Taiwan, which manufactures ourGPS digital receiver chips; and Micronet, in Israel, which supplies our *i*DT. Should there be a sustained increasein average exchange rates for the local currency in any of the foregoingcountries, our suppliers may request increased pricing on any new agreements.If this were to occur for all of these currencies and with each of thesesuppliers, a ten percent increase in average exchange rates could increase ourproduct costs by approximately 2.5%.

We donot use derivative financial instruments for speculative trading purposes, nordo we currently hedge any foreign currency exposure to offset the effects ofchanges in foreign exchange rates. Similarly, we do not use financialinstruments to hedge operating expenses of our subsidiaries in India or theUnited Kingdom.

**EquityPrice Risk**

TheSeries B-1 and B-2 redeemable preferred stock, issued in connection with theVidus acquisition, included an embedded derivative instrument, the “top-upamount”, which is indexed to our common stock. The top-up amount is payableupon the redemption of preferred stock after September 25, 2006 and iscalculated as follows: $54.2 million less the greater of (i) $38.0 million or(ii) 5.6 million, multiplied by the highest average closing sale price of ourcommon stock for any ten consecutive trading day period from September 25, 2005to September 25, 2006 plus $15.0 million.

Thefair value of this derivative instrument was estimated at $3.9 million at June30, 2006, $4.1 million at March 31, 2006 and at $2.9 million at December 31,2005. The change in the fair value of $135,000 and $(1.0) million was recordedin total other income (expense), net in the condensed consolidated statement ofoperations for the three and six months ended June 30, 2006, respectively.

Basedon the highest ten consecutive trading days average closing price of theCompany’s common stock of $5.73 per share through June 30, 2006, the aggregatetop-up, as if determined on June 30, 2006, is $7.1 million. The top-up amountwill further decrease if, and to the extent that, the average closing price ofour common stock for any ten consecutive trading day period ending on or beforeSeptember 25, 2006 is greater than $5.73 per share.

**Item 4. Controls and Procedures.**

As of June 30, 2006, we carried out an evaluation,under the supervision and with the participation of our management, includingour principal executive officer and principal financial officer, of theeffectiveness of our disclosure controls and procedures as defined in Rule13a-15(e) of the Securities Exchange Act of 1934 as amended (“Exchange Act”).As part of our evaluation, we considered factors such as whether data, if any,concerning significant changes to our business, new agreements entered intoduring the quarter, changes in relationships with suppliers and customers, newresource commitments, litigation matters, the material weaknesses describedbelow and changes in accounting interpretations were disclosed in connectionwith the disclosure committee’s investigation of such matters. In addition, weconsidered the comments, if any, of process owners regarding their awareness ofany matters that could give rise to additional disclosure.

Based upon that evaluation, as of June 30, 2006, ourprincipal executive officer and principal financial officer concluded that, asa result of the material weaknesses in our internal control over financialreporting that have not been fully remediated, as described below, ourdisclosure controls and procedures were not effective in recording, processing,summarizing and reporting, on a timely basis, information required to bedisclosed by us in the reports that we file or submit under the Exchange Act,and were not effective in ensuring that information required to be disclosed byus in the reports we file or submit under the Exchange Act is accumulated andcommunicated to our management, including our principal executive officer andprincipal financial officer, or persons performing similar functions, asappropriate to allow timely decisions regarding required disclosure.

A disclosure controlsystem, no matter how well conceived and implemented, can provide onlyreasonable assurance that the objectives of such control system are satisfied.Because of the inherent limitations in all control systems, no evaluation ofcontrols can provide absolute assurance that all control issues, if any, withinthe company have been detected. The Company did design into its processsafeguards to reduce, though not eliminate, this risk.

We previously describedtwo material weaknesses in our internal control over financial reporting (assuch phrase is defined in Rule 13a-15(f) under the Exchange Act) in Item 9A,Controls and Procedures, of our Annual Report on Form 10-K/A for the fiscalyear ended December 31, 2005. Public Company Accounting Oversight BoardAuditing Standard No. 2 describes a material weakness as a significantdeficiency, or combination of significant deficiencies, that results in morethan a remote likelihood that a material misstatement of the annual or interimfinancial statements will not be prevented or detected.

In Item 9A, Controls andProcedures, of our Annual Report on Form 10-K/A for the fiscal year endedDecember 31, 2005, we referenced the remediation plan that we commencedimplementing prior to December 31, 2005 to help address the previously reportedmaterial weakness relating to non-recurring transactions. As of December 31,2005, we had not fully remediated the material weakness related to theaccounting for non-recurring transactions. During the second quarter of 2005,we commenced implementation of a remediation plan to supplement our existingprocesses to (a) identify internally such transactions occurring during areporting period and (b) assess the accounting treatment to be used inconnection with those transactions. These supplemental elements include (i)additional internal reviews of the underlying transactions and relatedaccounting conclusions and (ii) the use of external consulting expertise toprovide additional advice relating to our accounting interpretations. Thephrase “external consulting expertise” means that the Company would engage theservices of an independent registered public accounting firm or third partywith appropriate accounting knowledge and expertise.

In addition, we did notaccurately calculate, or perform a timely review of, our provision for incometaxes.  This deficiency in internalcontrol constituted a material weakness. 

During the six monthsended June 30, 2006, we implemented the following changes to help address previouslyreported material weaknesses:

·      We reviewed with the Audit Committee ofthe Board of Directors all accounting policies adopted or changed andsignificant management estimates; 

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·      We increased our internal resources byadding four additional certified public accountants to our finance staff; 

·      We engaged external consulting expertiseto assist management with its valuation and initial adoption of SFAS 123R andthe preparation of the provision for income taxes; and

·      We increased the level of review anddiscussion of significant tax matters and supporting documentation with seniorfinance management.

During the quarter endedJune 30, 2006, we accomplished a limited number of the measures set forth inour remediation plans. However, no change in our internal control overfinancial reporting occurred during the quarter ended June 30, 2006 that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

The remedial measuresimplemented by us to date will not in and of themselves remediate the materialweaknesses, and certain of these remedial measures will require some time to befully implemented or to take full effect. Because of the inherent limitationsin all control systems, no evaluation of controls can provide absoluteassurance that all control issues, including instances of fraud, if any, havebeen detected. Because of the inherent limitations in a cost-effective controlsystem, misstatements due to error or fraud may occur and not be detected andcould be material and require a restatement of our financial statements. Overtime, the controls and procedures we have implemented may become inadequatebecause of changes in conditions, or the degree of compliance with policies orprocedures may deteriorate. The actual efficacy of these initiatives and of ourcontrols and procedures is subject to review by our management, supported byconfirmation and testing by our management.

If the remedialmeasures described above are insufficient to address the identified materialweaknesses, our financial statements may contain material misstatements. Amongother things, any unremediated material weakness could result in materialpost-closing adjustments in future financial statements.

In light of thematerial weaknesses described above, we performed additional analysis and otherpost-closing procedures to ensure that the condensed consolidated financialstatements were prepared in accordance with accounting principles generallyaccepted in the United States of America. Accordingly, management believes thatthe financial statements included in this report fairly present in all materialrespects our financial condition, results of operations and cash flows for theperiods presented.

The certifications of ourprincipal executive officer and principal financial officer required inaccordance with Section 302 of the Sarbanes-Oxley Act are attached asexhibits to this Quarterly Report on Form 10-Q. The disclosures set forthin this Item 4 contain information concerning the evaluation of ourdisclosure controls and procedures, and changes in internal control overfinancial reporting, referred to in the certifications. This Item 4 shouldbe read in conjunction with the officer certifications for a more completeunderstanding of the topics presented.

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**PART II. OTHER INFORMATION**

**Item 1. LegalProceedings.**

Fromtime to time, we are subject to claims in legal proceedings arising in thenormal course of our business. Based on our evaluation of these matters, webelieve that these matters will not have a material adverse effect on ouroperations or financial position.

**Item 1A.Risk Factors.**

Except as set forth below, during the six months endedJune 30, 2006, there were no material changes to the descriptions of the riskfactors associated with our business previously disclosed in Item 1A ofPart I of our Annual Report on Form 10-K/A for the year ended December 31, 2005which is incorporated herein by reference.

**Asubstantial portion of our revenue is attributable to a small number ofcustomers, the loss of any one of which would harm our financial results.**

For the three and six months ended June 30, 2006,three of our customers represented, in the aggregate, approximately 31% of ourtotal revenues.  Approximately 16% and15% of our total revenues for the three and six months ended June 30, 2006,respectively, were attributable to one customer, AT&T Inc. The loss of asignificant volume of business from any of these customers could be expected toresult in a material decrease in our total revenue and could negatively impactour financial results.

**Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.**

None.

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**Item 3.Defaults Upon Senior Securities.**

None.

**Item 4.Submission of Matters to a Vote of Security Holders.**

On June 8, 2006, we held our annual meeting ofstockholders. The following summarizes the matters submitted to a vote of thestockholders:

1. The election of the following nominees to serve asmembers of our Board of Directors: 

| Nominee        | ** ** | **Votes in Favor** | ** ** | **Votes Against** | ** ** |
|----------------|------------|------------------------------|------------|------------------------|------------|
| Kris Chellam   |       | 48,365,726                   |       | 9,848,019              |       |
| James W. Davis |       | 54,156,263                   |       | 4,057,482              |       |

 

2. The ratification of the appointment ofDeloitte & Touche LLP as our independent registered public accountingfirm for the year ending December 31, 2006:

| Votes in Favor: 58,097,509 | Votes Against: 90,646 | Votes  Abstaining: 25,589 |
|----------------------------|-----------------------|---------------------------|

 

The names of each director other than Mr. Chellam andMr. Davis, whose term of office as a director continued after the annualmeeting of stockholders is set forth below:

Krish PanuCharles E. LevineT. Peter Thomas

**Item 5.Other Information.**

None.

**Item 6. Exhibits.**
| 31.1   |   | Rule 13a-14(a)/15d-14(a) Certification |
|--------|--------|---------------------------------------------|
|   |   |                                        |
| 31.2   |   | Rule 13a-14(a)/15d-14(a) Certification |
|   |   |                                        |
| 32.1   |   | Section 1350 Certification             |
|   |   |                                        |
| 32.2   |   | Section 1350 Certification             |

 

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.
|        | **@ROAD, INC.**                              | ** **          |
|--------|----------------------------------------------|---------------------|
|   |                                         |                |
|   | By:                                          | /s/ Michael Martini |   |
|   |                                         |
|   | Michael Martini                              |
|   | Chief Financial Officer                      |
|   | (Principal Financial and Accounting Officer) |
|   |                                         |
|   | Date: August 9, 2006                         |
|        |                                              |                     |  |  |

 

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***Exhibit Index***

**Exhibits**
| 31.1   |   | Rule 13a-14(a)/15d-14(a) Certification. |
|--------|--------|----------------------------------------------|
|   |   |                                         |
| 31.2   |   | Rule 13a-14(a)/15d-14(a) Certification. |
|   |   |                                         |
| 32.1   |   | Section 1350 Certification.             |
|   |   |                                         |
| 32.2   |   | Section 1350 Certification.             |

 

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